When governments need to raise funds, they often do so by issuing bonds through public auctions. In this process, the government as the issuer, offers securities directly to investors who participate in an auction to purchase them. Banks are frequent participants, but the auction is open to various types of investors. Here's how the issuance process works.

First, the issuer decides the maturity and size of the bond issuance. For example, the US Treasury might announce a 10 year treasury bond issuance with the total face value of $10 billion.

Then the issuer announces the details of the issuance and begins collecting bids submitted by investors. Investors can place two types of bids, competitive and non-competitive. In a competitive bid, investors specify both the amount they want to purchase and the yield they're willing to accept. For example, an investor might bid to buy $200 million at a yield of 4.524% or $300 million at 4.525%. Competitive bids give investors control over the yield they require, but they come with a risk. If the bid yield is too high, the investor might miss out on receiving any allocation in the auction. Non-competitive bids on the other hand, don't specify a yield. Investors only indicate the amount they want to buy, such as $3 million at the final auction price. Non-competitive bidders are guaranteed to receive the full amount they bid for, up to a specified limit, but they agree to accept the yield determined by the auction's outcome. This approach is often preferred by smaller investors who prioritize certainty of allocation over yield. Once all bids are collected, the allocation process begins. Non-competitive bids are filled first, guaranteeing these bidders, the quantity they requested at the final auction yield. After fulfilling all non-competitive bids, the remaining securities are allocated to competitive bidders. All bids are ranked from lowest to highest yield. Since the lower the yield, the investors is happy receiving, the higher the price they will be paying. The issuer then goes down this list until all of the remaining face value of the bond has been allocated. The final or high yield of the auction is also known as the stop. Competitive bidders who asked for yields equal to or below this stop, receive their allocation. While those with higher bid yields will not. This auction process helps the government efficiently raise funds at the lowest possible cost while giving investors a fair and transparent way to purchase government securities. By using a mix of competitive and non-competitive bidding, the auction balances the needs of both large institutional investors and smaller participants, ensuring broad participation in government bond issuance.