What happens when I bid at the stop rate in treasury bills?

Question: I was very excited when my bid coincided with the stop rate at the last treasury bills auction. I was happy that I am getting the maximum possible returns, only to find out that I was given only a fraction of the amount I bidded for. What really happened? How does it work?

Answer: This is what usually happens when your bid rate coincides with the official stop rate. You are only guaranteed full allocation of your bid amount when you bid below the bid rate.

To understand how this works, let me explain how the auction works in simplified terms. At each auction, the Federal Government aims to raise a specific amount of money through treasury bills of various tenors, ranging from 90, 182, and 364 days.

Let’s assume the plan was to raise N50Billion from 364 days tenor treasury bills at the auction. Bids are invited from brokers who collect bids from clients like you (including their own bids) and submit it accordingly to the Central Bank.

At the close of the auction, the Central Bank makes allocations starting from the lowest bids and works its way up until the amount required is achieved. The stop rate is the rate at which the amount required is achieved (N50Billion in this case). So folks that bid at the stop rate are at the borderline as the gates are being closed, so to speak.

There are many subscribers who bidded at the stop rate but the CBN has to draw the line if they are not to exceed the amount required. That means folks in this group cannot get all they asked for. To make it fair, everyone gets a fraction of what they asked for. This means allocations to this group is made on a pro-rata basis.

Let’s assume subscribers in this group requested for N5Billion (N5,000Million) but the CBN only needs N550Million to achieve the target amount of N50Billion. The N550Million will be allocated to such subscribers on a pro-rata basis. That means you will only get (550/5,000) x 100 which is 11% of your bid amount.

So if you requested for N1Million, you will be allocated N110,000.

You need to have this in mind when placing your bid, and leave a gap between your bid rate and predicted stop rate.