Israeli treasury auction reform

This study examines the results of the inclusion of primary dealers in trading in government bonds under the 2006 government bond reform. Using a unique database, we compared the results of Treasury Bond auctions before, during and after implementation of the reform in order to estimate the cost of raising government debt. In order to analyze the effect of the reform on liquidity in the secondary market, we used—in addition to the full demand and winnings database of each of the participants in each auction—an intra-day database. The structure of the data enabled us to test the result of the reform on the cost of government financing by means of a number of calculations for the auction premium. When we isolated the effects of the relevant market variables, we found that after the reform, the auction premium declined significantly, but the development of prices in the secondary market shortly after the auction also changed significantly. We also found that after the reform, the auction premium was negatively affected by the uncertainty and volatility-related variables in the market, which did not affect the auction premium before the reform.