Secondary market pricing behaviour around UK bond auctions

Abstract

Using an event study approach, this article reports evidence that the UK Treasury bond market displayed anomalous pricing behaviour in the secondary market both immediately before and after auctions of seasoned bonds. Using a benchmark return derived from the behaviour of the underlying yield curve, the market offered statistically and economically significant excess returns, around the auctions held between 1992 and 2004. A cross-sectional analysis of the cumulative excess returns shows that the excess demand at the auctions is a key determinant of this excess return.

Acknowledgements

This article is based on Chapter 7 of Ahmad's doctoral thesis at the University of Stirling and the helpful comments of his examiners, Mahendra Raj and Alan Goodacre are acknowledged. In addition, helpful comments were received from participants at the 2005 Global Finance Conference.

Notes

¹ Studies of bond market auction outcomes in other markets include Jegadeesh (1993), Nyborg and Sundaresan (1996), Scalia (1998) and Nyborg et al. (2002).

² Until 1991, public offers were also made by tender, which is a form of multi-object uniform-price auction with a reservation price.

³ Prior to the arrival of a formal auction calendar, the timing of the announcement date relative to the auction date changed a number of times.

⁴ A complementary procedure for benchmarking within event studies involves the use of matched samples. We considered using the returns on bonds with closely matching maturity and coupon characteristics, but we could not create a sample that appeared sufficiently homogeneous to remove the possibility that distorting coupon effects might remain. For cases where an obvious ‘matching’ bond did exist, benchmark returns created this way appeared to be of similar magnitudes to those created using the zero-coupon yield curve, see Ahmad (2004) for further discussion.

⁵ Equation 3 follows from the duration approximation for price changes in response to small changes in yield.