ARE UNITED-STATES TREASURY BILLS UNDERPRICED IN THE PRIMARY MARKET

Studies of securities markets have found that new issues of debt or equity tend to be underpriced in primary markets. We extend this research by examining the US Treasury bill market. The bill market provides an especially pure comparison of new and seasoned bill prices because when new bills are issued, identical securities are trading coincidentally in the secondary market. We find that it is cheaper to buy a bill in the primary market than to buy the same bill in the secondary market. We explain this 'underpricing' as a predictable consequence of auction-theoretic and microstructural differences in the primary and secondary market mechanisms.