"The primary dealer system acts as the underwriter of the Treasury sales which are sold in a Dutch-style auction, writes Michael Mackenzie in New York .
Under this approach, primary dealers and other investors make bids at set dollar amounts and enter them into a computer system, hot-wired to the Federal Reserve Bank of New York. From there the US Treasury collates all the bids and determines the rate at which it can sell the debt. Ahead of the 1pm auction deadline, dealers and investors try to ascertain what yield will be awarded for the sale. A guide is the grey market, which indicates where the pending security will trade.
If investors need to own the issue, they will place bids below the grey market yield, while others, banking on weak demand, may choose to place bids at higher yields.
Gauging the demand from investors who buy through the dealers, known as the "indirect bid" or other financial institutions who buy directly from the Treasury is the crucial element.
The indirect bids handled by primary dealers are split into two types of orders: those from customers such as hedge funds and money managers and the "house" bid from the banks' bond desks."
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