Government debt: the first buyer

Who holds government debt? · Episode 1

On 1 October 2026, France sold more of a promise that runs until 25 May 2048. For every €100 of principal, the bond pays €2 in annual interest and promises to repay the €100 at maturity. Successful bidders offered an average price of €57.23, before accrued interest. That gap provides an entry into the story: the promised payments remained unchanged, while the amount investors were willing to advance against them had moved. ^[1][9]

The bond was one of four securities offered at the auction, a scheduled sale in which the government selects among investors’ bids. The first announcement reported €11.999 billion in face value awarded. After an additional subscription round the following day, issuance reached €15.606 billion. Settlement was scheduled for 5 October. Those amounts describe the principal obligations created at different stages of the sale. Working out the money paid for them requires another set of figures: the prices. ^[1][2]

Who financed the government? The question seems to call for names: a bank, an insurer, a foreign fund. The public record first reveals a sequence of roles. Someone submits an order. A bidder receives an allocation. A payment is made. The security can change hands, sometimes under a sale arranged before it has even been delivered. At each stage, “the buyer” can refer to a different party. ^[3][7][15]

This opening instalment follows the creation of government debt through two October transactions, in France and the United States. It begins a series about the institutions that enable governments to borrow, and the funding on which those institutions themselves rely. An IMF analysis published on 6 October examined precisely this dual role of hedge funds: they can make markets easier to trade while amplifying strains when financing conditions tighten. Understanding that transmission starts before leverage and margin calls, when newly issued government securities are priced. ^[22]

Fresh borrowing also pays yesterday’s creditors

A government’s financing needs extend beyond its budget deficit. Bonds issued in earlier years reach maturity. Their holders expect repayment on a contractual date, even when spending has been cut or the fiscal balance has improved. Part of each year’s borrowing therefore replaces funding that is coming to an end.

France’s initial budget law, enacted on 19 February 2026, illustrates this turnover. It provided for a €310 billion financing requirement, including €169.9 billion of medium- and long-term debt redemptions, compared with a €134.6 billion budget deficit. Repayment of debt assumed from SNCF and other cash requirements made up the rest. These are the plans enacted in February, used here to explain the mechanism. They are not an updated estimate of October’s budget execution. ^[20]

Consider a bond that matures on a Monday and a new issue that settles that same day. The government receives money from its new subscribers and returns money to the holders of the maturing security. Within this simplified sequence, a large issuance can accompany a much smaller change in the outstanding debt stock. The repayment schedule matters alongside the deficit when explaining why a treasury regularly returns to the market. ^[20]

Securities are also designed to remain tradable. Agence France Trésor, the French debt management office, can add to an existing bond rather than create a completely new contract at every sale. A reopening preserves the bond’s terms, including its maturity and its coupon, the periodic interest payment. Newly issued securities join the existing ones under the same identifier. This fungibility is central to the French OAT, short for obligation assimilable du Trésor: it helps concentrate trading in larger bond issues. ^[10]

The 2% bond due in 2048 was originally launched through a bank syndicate in May 2017 and subsequently enlarged at auctions. France is reusing an old contract at today’s market price. Its coupon records the terms fixed for that bond; the price at a reopening reflects what investors will currently pay for its future cash flows. ^[3][9]

At 10:50 a.m., prices come before names

France’s regular OAT auctions operate through its primary dealers, known as SVTs, or spécialistes en valeurs du Trésor. Fifteen institutions hold that status for 2025–27. They include BNP Paribas, Crédit Agricole CIB, Société Générale, Barclays, JPMorgan and Nomura. Their remit includes participating in issuance, distributing the securities and maintaining an active secondary market. Membership describes an intermediary’s function. The bank’s home country says little about the nationality of all the investors it serves. ^[4]

The role carries obligations. Except in cases of force majeure, the dealer charter requires participation in every auction. It also assesses activity over rolling twelve-month periods, with thresholds applying to different categories of securities. The arrangement combines continuous presence with a contribution measured over time. The charter’s 2% threshold should not be read as a requirement to buy 2% of every individual issue. ^[5]

For the government, this creates a recurring network of counterparties. For the dealers, it provides organised access to the supply of securities they distribute and trade. Performing that service has an economic cost: an intermediary needs balance-sheet capacity, customers, ways to manage risk and compensation for the resources it commits. Accreditation does not determine the price at which it is willing to bid. ^[4][5]

At a standard auction of nominal OATs, bids can reach the Banque de France until 10:50 a.m., Paris time. The central bank passes an anonymised bid schedule to AFT. Each order specifies a quantity and a price. AFT chooses how much to allocate, accepts the highest prices first and works down until the required amount is placed. Orders at the cut-off can be filled only in part. Each successful bid is paid at the price it offered. ^[3]

Take a hypothetical sale of €100 million in face value. One bidder offers €99.20 per €100 of principal and requests €50 million. A second offers €99.10 for €40 million. A third offers €99 for another €40 million. The first two bids are filled in full, leaving only €10 million for the third. Total bids reach €130 million, while buyers pay €99.14 million altogether, assuming zero accrued interest for this illustration. ^[3]

The cut-off is therefore a specific point in a schedule of prices and quantities. At the actual 1 October auction, bids for the November 2036 OAT at a price of 90.35 were filled at 69.64%; bids above that price were accepted in full. The reported volume of demand adds together conditional decisions. A euro bid at a lower price would not necessarily have been bid at the price paid by the most aggressive buyer. ^[1][3]

The coupon stays still while the price falls

A fixed-rate bond is a schedule of payments. Its buyer acquires the right to receive them, provided the issuer meets its obligations. When investors require a higher return, the price they are willing to pay for that schedule falls. The same euros arrive on the same dates, but the buyer has paid less for them. The resulting yield is higher. ^[9][10]

The OAT maturing on 25 November 2036 makes it possible to observe this adjustment without changing the contract. Its annual coupon remains 3.70% of principal. On 2 July, the average auction price was 99.74 and the average yield was 3.73%. On 3 September, the corresponding figures were 95.66 and 4.23%. On 1 October they stood at 90.38 and 4.93%. Between the last two auctions, the yield rose by 0.70 percentage point, or 70 basis points. ^[8]

This comparison establishes a narrow but useful fact: on the five observed dates, the government sold claims on the same coupons and the same final repayment on different terms. It leaves the causes of the changes open. Inflation expectations, the prospective path of short-term interest rates, bond supply, liquidity and assessments of sovereign risk can all enter the price. Assigning the entire movement to a political decision would require evidence that an auction history alone cannot supply. ^[8][17]

The older 2% bond due in 2048 makes the gap between coupon and yield even clearer. At its average price of 57.23, its average auction yield on 1 October was 5.40%. That yield incorporates the timing and amount of all scheduled payments, including the €100 of principal due at maturity. Simply dividing the annual €2 coupon by €57.23 would leave out that eventual principal repayment and the time remaining until it is received. ^[1][9]

The buyer also pays accrued interest, the portion of the next coupon corresponding to the time elapsed since the previous coupon date. At settlement on 5 October, 133 days had passed since 25 May. Under the bond’s conventions, that amounts to about €0.729 per €100 of principal. Using the published average price, the illustrative all-in payment is therefore about €57.959. An individual successful bid can have a different price from the published average. ^{[24] [9]}

When the next full coupon is paid, part of it corresponds to the interest already paid by the buyer at purchase. That is why a bond’s price excluding accrued interest, its clean price, differs from its full settlement payment. The difference between €100 and €57.23 concerns a distant principal obligation purchased at a discount. It is not a profit handed to the subscriber at the time of purchase. Comparing financing arrangements requires putting their payments on the same timeline. ^[9][10]

The following day, the issue gets bigger

The French auction has a further stage. Dealers hold supplementary subscription rights, known as post-auction non-competitive bids, under the charter and its annexes. These allow additional purchases at the auction’s weighted average price, rounded according to the applicable rules. “Non-competitive” here refers to the absence of a new price bid: the competitive auction has already established the price. ^[6]

The 1 October announcement explicitly stated that the total could increase through the ONC2 subscription round on Friday 2 October. It did. Across the four bonds, supplementary subscriptions reached €3.607 billion in face value. Initial awards of €11.999 billion consequently became total issuance of €15.606 billion. The announced range of €10 billion to €12 billion applied before this addition. ^[1][2]

These rights form part of the economics of being a dealer. The opportunity to subscribe at a price set the previous day can be valuable when market prices move favourably. Its value depends on accessible quantities, customer commitments, funding costs and subsequent market conditions. Public documents explain the arrangement. They do not disclose each bank’s profit on this particular operation or the destination of every allocation. ^[6]

Matching amounts with prices produces a second reconciliation. Valuing the €15.606 billion of face value at each bond’s published average price gives approximately €12.521 billion of consideration before accrued interest. The €3.085 billion difference reflects the discount of the issued bonds to their redemption value. It connects a future principal promise to a present price; it does not identify an additional recipient of money from the transaction. ^[2][6]

This is a reproducible estimate. AFT publishes weighted average prices rounded to one cent per €100 of principal, so applying them to published volumes cannot reconstruct each individual settlement. Applying the rounding margin to the full face amount gives a conservative uncertainty bound of about €0.78 million. Because supplementary subscriptions settle at the rounded average price, applying this margin only to the initial €11.999 billion reduces the bound to about €0.60 million. Accrued interest must also be added. The €12.521 billion estimate is consequently not presented as the exact amount credited to the Treasury’s account. ^[2][6]

Moving from principal to cash explains why an issuance headline needs its unit attached. The government manages present cash receipts alongside future interest and principal payments. A low-coupon bond sold below par raises less cash for each euro of principal, while retaining its low contractual coupon. Its economic cost must incorporate both. The valuation gap taken in isolation is no measure of a subsidy to the banking sector. ^[9][10]

When the promise becomes a payment

An award creates a transaction commitment. Settlement and delivery complete its two sides: the securities are delivered and the purchase money is paid. For the French sale examined here, the published settlement date was 5 October. The Banque de France helps operate the auctions and oversee settlement; the cash movements of the government and its Treasury correspondents are centralised through the Treasury’s single account at the central bank. ^[1][7]

Consider a straightforward case in which a dealer buys for its own account and subsequently sells the bonds to a fund. At issuance, the payment reaches the government in exchange for new securities. On resale, the fund’s money goes to the seller. The government still owes coupons and principal to successive holders, but that secondary transaction creates no additional issuance proceeds for the state. ^[7][10]

Actual timing can be much tighter than this illustration suggests. An intermediary may arrange a resale before receiving the bonds. In the United States, the when-issued market allows trading in announced securities ahead of their effective issue date. Other subscribers buy directly with the intention of holding. Assuming that every new bond must spend several days in a bank’s proprietary portfolio before reaching an investor would impose a sequence that the market does not require. ^[12][15]

The distinction between original issuance and subsequent circulation nevertheless matters. Buying an existing bond enables the seller to recover cash. That exit opportunity helps make future auctions attractive: investors can consider selling before maturity. Government financing thus relies partly on a market in which public promises can be exchanged, although those exchanges do not each bring the issuer fresh money. ^[10][17]

The central bank’s operational presence also needs to be separated from investment ownership. Maintaining a government account and processing settlement are operational functions. In the euro area, Article 123 of the treaty prohibits the ECB and national central banks from providing overdrafts or other credit to the relevant public authorities and from buying their debt directly. Processing an OAT payment does not, by itself, make the central bank the bond’s investor. ^[7][21]

In the United States, dealers bid heavily and receive little

On 8 October, the U.S. Treasury published results for a reopening of a bond due in August 2056, with twenty-nine years and ten months remaining. The coupon is 5.125% and the auction yield was 5.618%. Unlike France’s arrangement in which accepted bids pay their respective prices, the U.S. mechanism awards this type of security at a uniform price. Settlement is scheduled for 15 October, still in the future at this investigation’s 11 October cut-off. ^[11][12][14]

The U.S. release provides information that the French announcement does not offer in the same format: competitive bids and awards broken down by participation channel. It lets us separate the amount a category requested from the amount it received, rather than treating one as a proxy for the other. ^[11][13]

Primary dealers submitted $29.433 billion of own-account bids, out of $55.853 billion in competitive tenders. Their share was therefore 52.7%. Their awards amounted to just $1.491 billion, or 6.8% of the $21.940 billion competitively allocated. This category submitted the majority of bids but received a small portion of the securities. ^[11]

That contrast is surprising only when orders are imagined as money offered without conditions. Allocation depends on the prices at which participants will buy and on competing bids. U.S. primary dealers are expected to participate proportionately in auctions with reasonably competitive bids; regular participation is part of their role. A small allocation on a given day cannot, on its own, establish an intention to boycott the issuer. ^[12][15]

Indirect bidders received approximately $15.866 billion, or 72.3% of competitive awards. The official definition covers customers who bid through an authorised intermediary. They can be domestic or foreign. Turning that percentage into “the share bought by foreigners” would assign a nationality to an order-submission channel. ^[11][13]

A bank that obtains only a small proprietary allocation may also have submitted many customer orders. Treasury’s classification does not count those orders as the bank’s own-account purchases. The intermediary’s distribution role and the quantity of securities awarded to its own balance sheet answer different questions. ^[13]

The totals need one further adjustment. Roughly $60.4 million of non-competitive awards sit alongside the competitive allocation, bringing the subtotal to a little over $22 billion. The Federal Reserve’s SOMA portfolio is awarded a separate amount of about $522.5 million under its mechanism for rolling over maturing securities. This addition is excluded from the reported bid-to-cover ratio. A SOMA rollover exchanges maturing Treasury holdings for newly auctioned securities under the operational rules; including it in a measure of private demand would blur the distinction. ^[11][16]

An auction establishes a price and leaves questions open

The U.S. bid-to-cover ratio of 2.54 divides bids within the published subtotal, including non-competitive bids, by awards on the same basis. The French coverage ratios for the four 1 October bonds divide requested quantities by initial awards, before the supplementary round. The ratio describes the volume of orders relative to the quantity being placed. It does not measure the resources those buyers would deploy at any price. ^[1][11]

In our small hypothetical auction, orders totalling €130 million cover a €100 million sale. Adding a very large order at an extremely low price would raise the ratio without increasing proceeds if the order remained outside the allocation. This follows from the arithmetic of the measure. Assessing placement conditions therefore requires examining the prices proposed and accepted, as well as their relationship to the market. ^[3]

A fuller assessment of a U.S. auction can compare its final yield with the yield observed immediately before the result in the when-issued market. The exact timestamp, security maturity and reliability of the quote become essential. This investigation does not have a verifiable intraday price series with which to perform that test for 8 October. Calling the auction either outstanding or disastrous would go beyond the evidence assembled here. ^[15][17]

The strongest qualification to a story of banks becoming unable to finance governments comes from research released by the New York Fed in March 2026 and revised in July. Michael Fleming, Weiling Liu and Giang Nguyen analyse intraday data from 1991 to 2024. They find auction-related price pressure associated with intermediary constraints, but also a decline in that pressure in the more recent part of their sample, partly because other investors absorb a larger share of issuance. ^[17]

This finding suggests a more useful line of inquiry than an automatic diagnosis of exhausted dealer capacity. The system can adapt as investors move closer to the original auction and reduce the amount dealers need to hold. Their own funding and constraints then become the next questions. Funds buying with borrowed money present a different issue from investors drawing on stable savings. Recent IMF and Financial Stability Board work places precisely these financing and collateral arrangements at the centre of the analysis. ^[17][22][23]

How far can the creditor actually be identified?

The first stage of this investigation establishes several facts firmly: the contracts offered, the dates, allocated quantities, prices and some participation categories. France’s published dealer list identifies the authorised network. It does not turn aggregate auction results into a register of bond ownership. ^{[1][2][4][11]}

The documentary boundary in France is explicit. The dealer charter’s annexes govern publication of results and restrict circulation of anonymised bid schedules to authorised teams. The public gets aggregate prices and volumes; complete order books and subsequent portfolios fall outside that disclosure. The restriction does not imply that operators or public authorities are unaware of their counterparties. ^[6][7]

Other statistics pick up the trail, but with different scopes. The U.S. Treasury publishes allocations by investor class on a separate schedule. AFT disseminates aggregate holdings data, including figures produced with the Banque de France. A quarter-end stock measured at market value and a flow of principal allocated at an October auction describe different things at different dates. ^[18][19]

Even identifying a holder would not reveal every layer of risk. A security can be retained, sold or used to raise funding. The investigation therefore has to distinguish the purchase channel, the holder, its resources and its commitments to others. Immediate auction figures illuminate the entrance to that chain. Following it requires balance-sheet, trading and financing evidence. ^[13][22][23]

The first result is a reconstruction of the route. In France, the €11.999 billion initially announced on 1 October becomes €15.606 billion in principal promises after supplementary subscriptions, worth about €12.521 billion before accrued interest at the published average prices. In the United States on 8 October, dealers responsible for more than half of competitive bids received only 6.8% of the corresponding awards. In both cases, the documents require looking beyond the most visible number. ^[1][2][11]

For the issuer, what matters is that someone can name a price, pay on the due date and, depending on its business model, hold or distribute the bond. Part two follows dealers’ balance sheets: how much debt can an intermediary carry, for how long, and with whose money?

Method and scope

This documentary investigation has a cut-off of 11 October 2026. It uses public primary sources and original research published by the New York Fed. The French figures concern central-government OATs, not all debt issued by France’s general government. The U.S. figures describe a specific auction, not the federal debt stock. No interviews, access to private portfolios or identification of ultimate investors are claimed.

The figures provide the inputs used in the calculations. Estimated French proceeds before accrued interest use rounded published average prices. The hypothetical order book and the circulation diagram are labelled as teaching examples. Original sources are linked directly below. The French total is reproduced by multiplying each final face amount by its price per €100, then adding the results: (7,927 × 90.38 + 2,056 × 90.46 + 2,828 × 67.10 + 2,795 × 57.23) / 100 = €12,521.4467 million before accrued interest.