Definition
A non-competitive tender is an auction bid made by an investor, usually a small investor, to purchase a debt security where the price is determined by the average price of all competitive bids submitted. This type of tender allows investors to participate in the auction without having to specify a bid price.
How Non-Competitive Tenders Work
Non-competitive tenders function through a detailed auction process typically conducted by government entities or large institutions issuing debt securities such as Treasury bonds or bills.
- Announcement of Auction: The issuing authority announces an auction, specifying the details and total amount of securities available.
- Submission of Bids: Investors submit either competitive or non-competitive bids. In a competitive bid, investors specify the yield or discount rate they are willing to accept. In a non-competitive bid, investors agree to accept the yield determined by competitive bids.
- Allocation of Securities: All non-competitive bids are accepted up to a certain limit, ensuring participation for small investors. The securities are then allocated at the average price or yield of the accepted competitive bids.
Example
Consider a Treasury bill auction:
- The U.S. Department of the Treasury announces a $10 billion auction of 13-week Treasury bills.
- An investor submits a non-competitive tender for $5,000.
- The Treasury receives competitive bids from larger institutions and determines the average accepted bid yield to be 0.2%.
- The investor is allotted $5,000 worth of Treasury bills at the yield of 0.2%.
Historical Context
The concept of non-competitive tenders was introduced to democratize the process of purchasing government securities, allowing smaller investors to participate without the need for the expertise to assess bid prices accurately.
Applicability
Non-competitive tenders are particularly useful for small and individual investors seeking a straightforward approach to participating in debt auctions. They are often used in the following contexts:
- Treasury auctions
- Government bond issuances
- Municipal bonds
Comparisons
- Competitive Tenders: Unlike non-competitive tenders, competitive tenders require bidders to specify the yield or price they are willing to accept. Competitive tenders are typically made by institutional investors with the capability to analyze and bid accurately.
Related Terms
- Yield: The income return on an investment, typically expressed as an annual percentage.
- Debt Security: A financial instrument representing a loan made by an investor to a borrower.
- Auction: A process of buying and selling goods or assets by offering them up for bid and selling them to the highest bidder.
FAQs
Why should I consider a non-competitive tender?
Non-competitive tenders are ideal for investors who prefer a guaranteed allocation without the need to analyze and specify bid prices.
What are the risks associated with non-competitive tenders?
The primary risk is accepting the yield determined by the competitive bids, which may be lower than expected.
References
- U.S. Department of the Treasury. “Auction Process.” Treasury.gov.
- Investopedia. “Noncompetitive Bid Definition.”
Summary
Non-competitive tenders provide a simplified, accessible way for small investors to participate in debt security auctions. By agreeing to accept the average yield or price of competitive bids, investors ensure their participation without the complexities of specifying bid prices. This democratizes the investment process, allowing broader access to government securities and other debt instruments.
