When-issued (WI) trading refers to transactions in a Treasury security that has been announced but not yet settled. It establishes the market's consensus yield before the auction takes place.
When a new Treasury issue is announced (typically several days before the auction), dealers begin trading it on a "when, as, and if issued" basis. The when-issued yield:
When-issued trading serves an important price discovery function:
The when-issued market is most active in the hours leading up to the auction. The "1:00 PM level" (just before the typical 1:00 PM ET auction cutoff) is the standard reference point for calculating the tail.
When-issued trading carries settlement risk. If the auction does not proceed or terms change, WI trades may be canceled. In practice, this risk is negligible for standard Treasury auctions.
When-issued trading fills a specific window, and the window explains what the market is for.
The Treasury announces an auction several days in advance. The announcement gives the tenor, the size, the auction date, and the settlement date. It does not give a coupon, because the coupon is set by the auction result.
WI trading begins at that announcement and runs until the auction closes. Trades are agreed on a yield basis rather than a price basis, since no coupon exists yet to price against. Once the auction sets the coupon, every WI trade converts to a price and settles on the issue date alongside the newly awarded securities.
The market is busiest in the final hours. Bidders form their views late, because the more recent the information, the better the estimate of where the auction will clear.
The WI yield does three jobs at once, and each has a different beneficiary.
It sets the benchmark. The tail is measured against the WI level at the auction close. Without a WI market there would be no agreed reference for judging whether an auction priced well or badly.
It lets dealers pre-sell. A dealer can sell the new issue to a customer before owning any of it, then bid at the auction to cover the short. This is how the distribution system works. It converts the auction from a speculative purchase into a hedged one, which lets dealers bid more aggressively than they otherwise could.
It aggregates information. Every WI trade is a bidder revealing part of their view. By the close, the WI level reflects the pooled judgment of everyone planning to participate, which is why it is usually close to the eventual stop.
The third point has a consequence worth stating. A WI market that is accurate most of the time makes the tail a sharp signal precisely when it is wide, because a wide tail means the pooled judgment failed.
The WI market is useful and it is not a guarantee.
Liquidity is uneven. A 10 Yr WI trades continuously in size. A 20 Yr WI trades thinly, so its quoted level carries less information and can be moved by a single trade.
Positions are conditional. A WI trade only settles if the auction proceeds on the announced terms. The Treasury can change the size or postpone an auction, and it has done so during government funding disruptions. Such trades are then unwound at agreed levels rather than settled.
Short positions carry a squeeze risk. A dealer short the WI must obtain the security, either by winning it at auction or by borrowing it afterwards. If the issue is heavily shorted and awards are concentrated in few hands, the security can trade special in repo after issuance, which makes covering expensive.
The evidence points the other way. A pre-auction market reduces uncertainty, because bidders can see a consensus level rather than guessing in isolation. Markets without a WI mechanism tend to price with wider dispersion. The trade off is that WI trading concentrates information near the close, so a late move can leave the measured tail looking worse than the demand actually was.
Any institutional participant with a dealer relationship. In practice the activity is dominated by primary dealers, hedge funds, and large asset managers. Retail investors do not trade WI, though they participate in auctions directly through noncompetitive bids.
Because the coupon does not exist yet. The Treasury sets the coupon from the auction result, usually rounding to the nearest eighth of a percent below the stop. Until that number is fixed, there is no cash flow schedule to price, so yield is the only stable way to agree a trade.