How a Government Auction Sets Every Interest Rate in America

A few times every week, representatives from the U.S.'s biggest banks are required by law to participate in an event most Americans have never heard of. It lasts roughly thirty minutes. Billions of dollars change hands in a single sitting. By the time the rest of the country sits down for lunch, the event has already rippled through every corner of the economy: the rate on a new mortgage in Phoenix, the yield on a savings account in Atlanta, the cost of a car loan in Chicago, or the interest your business earns on cash in its treasury account.

It happens about 300 times a year, it is one of the most consequential recurring events in the U.S. economy, and outside of a small world of bond traders, almost nobody knows about it. It's the auction for U.S. Treasury securities: the mechanism that lets the federal government sell debt, where the country's underlying interest rate gets set, and surprisingly, where any business with the right account can sit at the same table as JPMorgan.

What is a Treasury Security?

The U.S. government spends more than it collects in taxes, which it has done for most of the last fifty years. To cover the gap, the Treasury Department borrows money, and the way it borrows is by selling debt to investors: a buyer hands over cash today in exchange for a promise that the government will pay it back, with interest, on a specific future date. That promise, written down and tradable, is a Treasury security.

A short-term security is called a Treasury bill, or T-bill, which matures (meaning the government pays it back) in a year or less. The medium-term version is a Treasury note, maturing in two to ten years. The long-term version is a Treasury bond, maturing in twenty or thirty. Together these bills, notes, and bonds make up the largest and most liquid debt market in the world. The U.S. national debt, currently over $39 trillion, is essentially a running tally of Treasury securities the government has issued and hasn't yet paid back. When a foreign government talks about holding "dollar reserves," what it actually owns is a pile of these securities.

Who Delivers Mail to the Mailman?

Maybe you’ve heard some version of the brain teaser "who delivers mail to the mailman?" If you go far enough up a chain, who's serving the person at the top? There's a clear answer when it comes to figuring out how interest rates are determined: it's the auction for U.S. Treasury securities.

The U.S. Treasury market uses a Dutch auction, which works differently than the auctions most people picture. There's no fast-talking auctioneer or paddles shooting into the air. In a Dutch auction, sealed bids are submitted ahead of a deadline, and the clearing price is determined all at once when the auction closes.

It’s easier to understand with an example. Say a company is looking to hire 1,000 people for the same job. Instead of posting a wage, the company instead asks interested candidates to submit the lowest hourly rate they'd be willing to accept. 10,000 people submit a bid, and the company then sorts the bids from lowest to highest. The company hires only the cheapest 1,000, but everyone gets the wage set by the highest bid that still made the cut. A contractor who offered to work for $30 an hour and one who offered $55 both end up getting $55 as long as $55 was the cutoff. Bidding lower doesn't cost you anything, it just makes sure you're one of the people who gets hired.

A Treasury auction works the same way. Banks compete by offering to accept lower yields, the lowest bids win the allocation, and everyone who wins gets paid the same yield, set by the highest of the accepted bids. It's a deliberate design choice. It encourages banks to bid honestly at the rate they actually think the debt is worth, rather than shading their bids strategically.

The Treasury runs these auctions on a near-daily cadence. Bills are auctioned weekly, notes and bonds monthly or quarterly, and "cash management bills" go out as needed whenever there's a short-term funding gap to plug. Bidders fall into three categories. Primary dealers, currently about two dozen large banks designated by the Federal Reserve Bank of New York, are obligated to bid in every auction at competitive prices. These are names you'd recognize: JPMorgan, Goldman Sachs, Citi, Morgan Stanley, Barclays. Beneath them are direct bidders, or institutional investors bidding for their own account. Then there are indirect bidders – everyone else, including everyone from foreign central banks to everyday bond investors going through TreasuryDirect.

J.P. Morgan, Goldman Sachs, and You

If you're a regular person and you want a piece of the U.S. debt market, the TreasuryDirect website is the entry point. Created by the Treasury Department in the late 1990s and available to anyone with a Social Security number or EIN, it lets individuals and businesses buy Treasury securities directly at auction without going through a broker. You set up an account, link a bank, and submit non-competitive bids for whatever maturity you want.

On auction day, you can get the same clearing yield as the primary dealers. A $5,000 non-competitive bid on a 13-week bill can earn you the same rate as a $50 million bid from JPMorgan. The minimum purchase is $100, which is the lowest barrier to entry of any market this large.

TreasuryDirect is used by retail investors building bond ladders, parents saving for college, retirees laddering income, and small businesses parking cash. It's also clunky. The interface dates to a different era of government web design, the funds take days to settle, and managing a cash position through it can be an exercise in patience. But it exists, and it's the cleanest proof that the auction is not a closed system.

Whether anyone bothered to use it depended a lot on what the auction was producing. For most of the 2010s, the answer was: not much. Following the 2008 financial crisis, the Federal Reserve pushed its policy rate to near zero and held it there for almost seven years. T-bill yields followed. A 4-week bill in 2015 paid you about 0.02 percent annualized, which on $100,000 of cash works out to twenty dollars over the course of a year. Treasury accounts barely existed as a product category because there was nothing for them to capture.

That changed in 2022. To combat inflation after the pandemic, the Fed raised its policy rate eleven times in eighteen months, taking it from near zero to over five percent — the fastest tightening cycle in roughly forty years. T-bill yields jumped with it.

Rates have come down somewhat since the Fed began cutting in late 2024, but they've stayed well above where they sat during the 2010s. The gap between what a business earns on cash in a checking account (still close to zero at most banks) and what the same cash can earn through Treasury securities (a market rate set every week) is the widest it's been in a generation. The choice of where to park your cash, a decision that didn't really matter for most of the last decade, suddenly matters a lot.

A Better Way to Capture the Yield

Enter treasury accounts, the modern instrument businesses use to participate in the Treasury securities market without dealing with TreasuryDirect.

Most banks offer some version of a treasury account, and most of them work similarly: the bank takes your cash, buys a mix of short-term Treasury securities and other money market instruments through its own internal desk, and pays you a yield after subtracting fees, account minimums, and whatever spread the bank decides to keep. The yield is usually fine. The minimum balance to open an account is often six or seven figures. And the underlying investments are typically the bank's own products, where the bank earns management fees on top of the spread it already pockets.

A Slash treasury account works differently.⁶ Your cash is invested directly into money market funds run by Morgan Stanley (MULSX) and BlackRock (TSTXX), two of the largest institutional asset managers in the world, holding short-term Treasury securities and other high-grade instruments. These are the same funds that pension funds, endowments, and Fortune 500 treasury desks use to park institutional cash. The yield passes through to the account holder, minus the funds' published expense ratios.

Slash isn't running its own in-house fund, isn't capturing a spread on the cash, and doesn't impose a six-figure minimum to access an account. You get up to 3.8% annualized yield, your funds are held at a SIPC-member broker-dealer that provides up to $500,000 of coverage in the event of a failure, and there’s no minimum balance to get started.

Most businesses hold significant cash in accounts paying close to zero, while the same cash, invested in a money market fund through a treasury account, could earn the rate set at auction every week. The cash is participating in the system either way. The only question is who collects the yield.