Editor’s note: This is general educational information about how a government securities auction is organised. It is not investment advice and does not describe any current auction or security. It draws on the official and multilateral documents listed at the end.
A bidder who asks for a low yield and a bidder who asks for a high one can end an SGS auction holding the same paper at the same yield, and that yield may be a number neither of them named. Singapore Government Securities are sold under a uniform pricing format, which means the auction produces one clearing yield for every successful bid rather than a separate outcome for each participant. The mechanics of how that single number is reached are set out in the ASEAN+3 Bond Market Guide for Singapore, published by the Asian Development Bank in 2016, which documents the auction rules the Monetary Authority of Singapore applies as fiscal agent for the government.
Who is allowed in the room
Auctions for conventional SGS bonds, Treasury bills and MAS bills are conducted by MAS exclusively with Primary Dealers, who submit bids on behalf of their customers. Investors cannot bid directly. Every application for an allocation is routed through one of the approved Primary Dealers, which enter bids through the SGS electronic applications service, and bids must be in by noon on auction day. The 2016 guide records 13 Primary Dealers, each obliged to underwrite an equal share of the issue, which means the paper is spoken for whether or not the wider market shows up.
The issuance itself is planned well before any bidding. MAS is empowered by the Development Loan Act, the Local Treasury Bills Act and the Government Securities Act to issue and manage securities for the government. The total amount issued is authorised by a resolution of Parliament with the President’s concurrence, MAS seeks the Minister for Finance’s approval for the total for each new financial year, and MAS then decides the timing and size of individual bond issues in consultation with the Primary Dealers. Bonds and bills follow an annual issuance calendar announced in advance, and there are roughly 5 business days between the announcement of an individual issue and its auction.
Two kinds of bid, and the order in which they are filled
Competitive bids state both an amount and a yield the bidder will accept. Tenders are entered on a yield basis, so the queue runs from the bidder demanding the least compensation to the bidder demanding the most. Noncompetitive bids state only an amount, with the applicant accepting whatever the auction produces.
The allotment order is the part that most descriptions leave out. Noncompetitive bids are allotted first, and the balance of the issue is then awarded to competitive tenders from the lowest to the highest yields. Noncompetitive applications are capped in aggregate at 40% of the issue size and prorated if necessary, with a limit of 1% of the issue on offer per applicant, subject to SGD2 million per application for bonds and SGD1 million for Treasury bills. Competitive allotment is capped too: 30% of the issue on offer per applicant for a Primary Dealer and 15% for a non-Primary Dealer, in both cases including any noncompetitive bids. The number of competitive bids a participant may enter is unconstrained.
MAS itself may take part, for instance to obtain securities for its money market operations. Its bidding is noncompetitive only, it announces its intention and intended bid size before the auction, and the amount allotted to it is published with the results.
The clearing yield, and what is published
Allotment is made on a uniform pricing basis at the highest accepted yield of successful competitive bids, also called the cutoff yield. Every successful competitive bidder receives that yield, not the yield individually tendered, and noncompetitive applicants receive it as well. Results follow the bidding closely, about 1 hour after bids, and settlement is about 3 business days later on a delivery versus payment basis through the MAS Enhanced Electronic Payment System.
The published results carry more than the headline. They include the amount applied for, the coupon rate, the average yield and price of successful bids, the cutoff yield and price, the percentage allotted at the cutoff yield, and the amount taken by MAS. Between the formal announcement of an issue and the issue date, Primary Dealers trade the security on a when-issued basis, which the guide describes as a price discovery mechanism for both MAS and the dealers before a single competitive bid is formally allotted.
Reopenings sit alongside the calendar. Mini-auctions, introduced in 2015, are reopenings of existing bonds with a maximum size of SGD1 billion, announced one month before the issuance date, with a bond scheduled in the calendar not reopened this way until at least 6 months after it was first issued that year. Instruments themselves are standardised: Treasury bills are zero coupon and traded at a discount, bonds pay a fixed semiannual coupon and redeem in a bullet, minimum denomination is SGD1,000, and benchmark bond issues have typically ranged from SGD2 billion to SGD3 billion.
Analysis: what the design tells you about the purpose of the issuance
The auction rules read like the rules of a market building exercise rather than a funding exercise, and that is what they are. The 2016 guide states plainly that the government does not need to finance expenditure through bond issuance because it operates a balanced budget and often runs surpluses, and that SGS issuance serves to build a liquid market and a government yield curve for pricing private debt, foster secondary trading, and draw domestic and international participants in. BIS Papers No 30 records the same pattern from the earlier period, noting that Singapore more than doubled its outstanding government securities to raise the stock to 39% of GDP at end-2001 despite fiscal surpluses.
Read against that purpose, several design choices stop looking technical. Uniform pricing removes the winner’s curse that a pay as bid format creates, where a dealer that bids most aggressively pays the most. Removing that penalty encourages tighter bidding and makes the clearing yield a cleaner reading of demand. Underwriting obligations on all 13 Primary Dealers guarantee the issue is covered, so a weak auction shows up in the cutoff yield and the allotment statistics rather than in a failed sale. The 30% and 15% allotment caps limit how much of a single line one participant can be allotted, which matters for a market whose stated purpose is a tradable benchmark curve.
What the mechanism does not establish is also worth stating. A cutoff yield is the marginal price of one issue on one morning, filled by a closed group of dealers bidding partly for their own books and partly for clients. It is not a poll of investor sentiment, and the gap between the average yield of successful bids and the cutoff yield says more about the shape of demand than either number alone. A reader comparing two auctions of similar tenor would look at the amount applied for against the amount on offer, the spread between average and cutoff yields, the percentage allotted at the cutoff, and how much of the issue MAS itself took, since a large noncompetitive allotment to the central bank changes what the remaining competitive tail represents. The figures above come from the 2016 edition of the guide, and auction parameters, dealer numbers and calendars are set by MAS and change over time, so a current auction should be read against the announcement for that issue.
