Pricing at auctions

The Debt Office issues government bonds and T-bills at auctions. The terms and conditions of the loan and the volume offered are announced a week in advance. Allocation will be made to those making the bids at the lowest interest rate (highest price).

Auctions are to take place at market prices...

Allocation will take place in accordance with the multi-price method, which means that each bidder who has received an allocation will pay the price or interest rate offered. The current market conditions will determine the price (yield) at which we sell our government securities.

Those who wish to purchase the securities offered make bids in line with or below the interest rates quoted in the market. If demand is strong, competition can mean that an auction takes place at a slightly lower yield and vice versa. This is the main principle of our auctions and is applied fully on most occasions. However, this can be slightly modified on special occasions.

...even though we sometimes adapt the volume allocated

We have not made any undertaking to issue the whole of the advertised volume in every situation. We reserve the right to reject bids if they can be considered as being unnecessarily expensive for the state. It should be pointed out that this is seldom the case. However, for the sake of clarity, an account is given here of the principles applied.

Bids can be rejected

The criterion for when a bid may be regarded as being unacceptably expensive is that it deviates from what can be regarded as justified in market terms. We consider it necessary to reserve this right on markets of such strength and depth as those we borrow in. Otherwise, wholly unreasonable borrowing costs could arise at periods.

The restrictiveness we maintain in allocation in auctions also means that primary and secondary markets are priced in a consistent way. It should be pointed out that we do not have any mechanical rule for when a bid should be rejected. Major deviations from indicative prices can be accepted in a volatile and uncertain market.

Sometimes, there may be reasons to be more restrictive, for instance, in the event of a large spread of offers in an otherwise stable market situation and with a small volume of bids. The appearance of the bid curve is also a factor that can affect the allocation decision. Major gaps in the bid curve can in certain situations indicate where the issue can be cut down.

Great restrictiveness in market support exchanges

In our regular borrowing, it is natural that we have to accept that demand in the auction in question has an impact on pricing. In auctions where we offer exchanges between different government securities and where exchanges are not directly linked to our funding, for instance, there are not the same justifications to create financial incentives for investors to participate.

No undertaking to borrow at indicative interest rates

It should finally be noted that there may arise situations where the interest rates indicated by the market participants may not either be used as the basis for allocation decisions at auctions. If the indicative interest rates develop in a way that is considered to be unreasonable in relation to other markets and more fundamental economic development, we reserve the right to set the yield/price unilaterally at auctions. The prerequisite for our being able to rely on the market’s indicative pricing is that it really does reflect the overall evaluation of all relevant information made by the market participants.

It should be underlined that the latter case purely relates to exceptional cases which could occur, for instance, in cases of suspected market manipulation or if indicative interest rates are not based on any actual market activities. Having said this, it should be underlined that our auctions normally take place very close to the indicative interest rate and that we normally also accept bids that are both above and below the market yields. There shall and should be incentives to have the opportunity of being able to buy a somewhat larger volume at a better interest rate than that offered by the market.