![Inverted yield 30 year - 3 month](https://upload.wikimedia.org/wikipedia/commons/0/0c/Inverted_yield_30_year_-_3_month.webp)
United States Treasury securities, also called Treasuries or Treasurys, are
government debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
instruments issued by the
United States Department of the Treasury
The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...
to finance government spending as an alternative to taxation. Since 2012, U.S. government debt has been managed by the
Bureau of the Fiscal Service
The Bureau of the Fiscal Service (Fiscal Service) is a bureau of the U.S. Department of the Treasury. The Fiscal Service replaced the Bureau of the Public Debt and the Financial Management Service effective October 7, 2012 by directive of Treasu ...
, succeeding the
Bureau of the Public Debt
The Bureau of the Public Debt was an agency within the Fiscal Service of the United States Department of the Treasury. United States Secretary of the Treasury Timothy Geithner issued a directive that the Bureau be combined with the Financial M ...
.
There are four types of marketable Treasury securities:
Treasury bills
United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Since 2012, U.S. gov ...
,
Treasury notes,
Treasury bonds
United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Since 2012, U.S. gov ...
, and
Treasury Inflation Protected Securities (TIPS). The government sells these securities in auctions conducted by the
Federal Reserve Bank of New York, after which they can be traded in
secondary markets. Non-marketable securities include savings bonds, issued to the public and transferable only as gifts; the State and Local Government Series (SLGS), purchaseable only with the proceeds of state and municipal bond sales; and the Government Account Series, purchased by units of the federal government.
Treasury securities are backed by the
full faith and credit
Article IV, Section 1 of the United States Constitution, the Full Faith and Credit Clause, addresses the duty that states within the United States have to respect the "public acts, records, and judicial proceedings of every other state." Acc ...
of the United States, meaning that the government promises to raise money by any legally available means to repay them. Although the United States is a sovereign power and may default without recourse, its strong record of repayment has given Treasury securities a reputation as one of the world's lowest-risk investments. This low risk gives Treasuries a unique place in the financial system, where they are used as cash equivalents by institutions, corporations, and wealthy investors.
History
To finance the costs of
World War I
World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, the United States, and the Ottoman Empire, with fightin ...
, the U.S. Government increased income taxes (see the
War Revenue Act of 1917 The United States War Revenue Act of 1917 greatly increased federal income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax ...
) and issued government debt, called
war bond
War bonds (sometimes referred to as Victory bonds, particularly in propaganda) are debt securities issued by a government to finance military operations and other expenditure in times of war without raising taxes to an unpopular level. They are ...
s. Traditionally, the government borrowed from other countries, but there were no other countries from which to borrow in 1917.
The Treasury raised funding throughout the war by selling $21.5 billion in '
Liberty bond
A liberty bond (or liberty loan) was a war bond that was sold in the United States to support the Allied cause in World War I. Subscribing to the bonds became a symbol of patriotic duty in the United States and introduced the idea of financi ...
s.' These bonds were sold at
subscription where officials created coupon price and then sold it at
par value
Par value, in finance and accounting, means stated value or face value. From this come the expressions at par (at the par value), over par (over par value) and under par (under par value).
Bonds
A bond selling at par is priced at 100% of face valu ...
. At this price, subscriptions could be filled in as little as one day, but usually remained open for several weeks, depending on demand for the bond.
After the war, the Liberty bonds were reaching maturity, but the Treasury was unable to pay each down fully with only limited budget surpluses. To solve this problem, the Treasury refinanced the debt with variable short and medium-term maturities. Again the Treasury issued debt through fixed-price subscription, where both the coupon and the price of the debt were dictated by the Treasury.
The problems with debt issuance became apparent in the late 1920s. The system suffered from chronic over-subscription, where interest rates were so attractive that there were more purchasers of debt than required by the government. This indicated that the government was paying too much for debt. As government debt was undervalued, debt purchasers could buy from the government and immediately sell to another market participant at a higher price.
In 1929, the US Treasury shifted from the fixed-price subscription system to a system of
auction
An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition ex ...
ing where 'Treasury Bills' would be sold to the highest bidder. Securities were then issued on a
pro rata system where securities would be allocated to the highest bidder until their demand was full. If more treasuries were supplied by the government, they would then be allocated to the next highest bidder. This system allowed the market, rather than the government, to set the price. On December 10, 1929, the Treasury issued its first auction. The result was the issuing of $224 million three-month bills. The highest bid was at 99.310 with the lowest bid accepted at 99.152.
Marketable securities
The types and procedures for marketable security issues are described in the Treasury's Uniform Offering Circular (31 CFR 356).
Treasury bill
![1969 $100K Treasury Bill (front)](https://upload.wikimedia.org/wikipedia/commons/5/52/1969_%24100K_Treasury_Bill_%28front%29.jpg)
''Treasury bills'' (''T-bills'') are
zero-coupon bond
A zero coupon bond (also discount bond or deep discount bond) is a bond in which the face value is repaid at the time of maturity. Unlike regular bonds, it does not make periodic interest payments or have so-called coupons, hence the term zero- ...
s that
mature in one year or less. They are bought at a
discount of the
par value
Par value, in finance and accounting, means stated value or face value. From this come the expressions at par (at the par value), over par (over par value) and under par (under par value).
Bonds
A bond selling at par is priced at 100% of face valu ...
and, instead of paying a coupon interest, are eventually redeemed at that par value to create a positive
yield to maturity
The yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, h ...
.
[Treasury Bills](_blank)
TreasuryDirect.gov. U.S. Department of Treasury, Bureau of Public Debt. April 22, 2011. Retrieved May 24, 2011.
Regular T-bills are commonly issued with maturity dates of 4, 8, 13, 17, 26 and 52 weeks, each of these approximating a different number of months. Treasury bills are sold by
single-price auction
Single-price auctions are a pricing method in securities auctions that give all purchasers of an issue the same purchase price. They can be perceived as modified Dutch auctions. This method has been used since 1992 when it debuted as an experiment ...
s held weekly. Offering amounts for 13-week and 26-week bills are announced each Thursday for auction on the following Monday and settlement, or issuance, on Thursday. Offering amounts for 4-week and 8-week bills are announced on Monday for auction the next day, Tuesday, and issuance on Thursday. Offering amounts for 52-week bills are announced every fourth Thursday for auction the next Tuesday, and issuance on the following Thursday. The minimum purchase is $100; it had been $1,000 prior to April 2008. Mature T-bills are also redeemed on each Thursday. Banks and financial institutions, especially
primary dealers
A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. The government may regulate the behaviour and number of ...
, are the largest purchasers of T-bills.
Like other securities, individual issues of T-bills are identified with a unique
CUSIP
A CUSIP is a nine-digit numeric (e.g. 037833100 for Apple) or nine-character alphanumeric (e.g. 38259P508 for Google) code that identifies a North American financial security for the purposes of facilitating clearing and settlement of trades. ...
number. The 13-week bill issued three months after a 26-week bill is considered a re-opening of the 26-week bill and is given the same CUSIP number. The 4-week bill issued two months after that and maturing on the same day is also considered a re-opening of the 26-week bill and shares the same CUSIP number. For example, the 26-week bill issued on March 22, 2007, and maturing on September 20, 2007, has the same CUSIP number (912795A27) as the 13-week bill issued on June 21, 2007, and maturing on September 20, 2007, and as the 4-week bill issued on August 23, 2007, that matures on September 20, 2007.
During periods when Treasury cash balances are particularly low, the Treasury may sell ''cash management bills'' (''CMBs''). These are sold through a discount auction process like regular bills, but are irregular in the amount offered, the timing, and the maturity term. CMBs are referred to as "on-cycle" when they mature on the same day as a regular bill issue, and "off-cycle" otherwise. Before the introduction of the four-week bill in 2001, the Treasury sold CMBs routinely to ensure short-term cash availability. CMB offerings then all but disappeared aside from occasional auction system tests until the
COVID-19 pandemic
The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identi ...
, when the Treasury used them extensively to reinforce its cash position amid fiscal uncertainty.
Treasury bills are quoted for purchase and sale in the secondary market on an annualized discount percentage, or
basis
Basis may refer to:
Finance and accounting
* Adjusted basis, the net cost of an asset after adjusting for various tax-related items
*Basis point, 0.01%, often used in the context of interest rates
* Basis trading, a trading strategy consisting ...
. General calculation for the discount yield for Treasury bills is:
:
Treasury note
![1976 $5000 8% Treasury Note](https://upload.wikimedia.org/wikipedia/commons/f/fd/1976_%245000_8%25_Treasury_Note.jpg)
''Treasury notes'' (''T-notes'') have maturities of 2, 3, 5, 7, or 10 years, have a
coupon payment every six months, and are sold in increments of $100. T-note prices are quoted on the secondary market as a percentage of the
par value
Par value, in finance and accounting, means stated value or face value. From this come the expressions at par (at the par value), over par (over par value) and under par (under par value).
Bonds
A bond selling at par is priced at 100% of face valu ...
in thirty-seconds of a dollar. Ordinary Treasury notes pay a fixed interest rate that is set at auction. Current yields on the 10-year Treasury note are widely followed by investors and the public to monitor the performance of the U.S. government bond market and as a proxy for investor expectations of longer-term macroeconomic conditions.
Another type of Treasury note, known as the
floating rate note
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread (also known as quoted margin). The spread is a rate that remains constant. Almost all ...
, pays interest quarterly based on rates set in periodic auctions of 13-week Treasury bills. As with a conventional fixed-rate instrument, holders are paid the par value of the note when it matures at the end of the two-year term.
Treasury bond
![1979 $10,000 Treasury Bond](https://upload.wikimedia.org/wikipedia/commons/3/3f/1979_%2410%2C000_Treasury_Bond_.jpg)
''Treasury bonds'' (''T-bonds'', also called a ''long bond'') have the longest
maturity at twenty or thirty years. They have a
coupon payment every six months like T-notes.
The U.S. federal government suspended issuing 30-year Treasury bonds for four years from February 18, 2002, to February 9, 2006.
As the U.S. government used budget surpluses to pay down federal debt in the late 1990s,
the 10-year Treasury note began to replace the 30-year Treasury bond as the general, most-followed metric of the U.S. bond market. However, because of demand from
pension funds and large, long-term
institutional investors, along with a need to diversify the Treasury's liabilities—and also because the flatter
yield curve
In finance, the yield curve is a graph which depicts how the yields on debt instruments - such as bonds - vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or ye ...
meant that the
opportunity cost of selling long-dated debt had dropped—the 30-year Treasury bond was re-introduced in February 2006 and is now issued quarterly. In 2019, Treasury Secretary
Steven Mnuchin said that the
Trump administration
Donald Trump's tenure as the 45th president of the United States began with his inauguration on January 20, 2017, and ended on January 20, 2021. Trump, a Republican from New York City, took office following his Electoral College victory ...
was considering issuance of 50-year and even 100-year Treasury bonds, a suggestion which did not materialize.
TIPS
''Treasury Inflation-Protected Securities'' (''TIPS'') are
inflation-indexed bond
Daily inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation or deflation on a daily basis. They are thus designed to hedge the inflation risk of a bond. Th ...
s issued by the U.S. Treasury. Introduced in 1997, they are currently offered in 5-year, 10-year and 30-year maturities.
The
coupon rate
In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product.
Customarily, coupons are issued by manufacturers of consumer packaged goods
or by retailers, to be used in r ...
is fixed at the time of issuance, but the principal is adjusted periodically based on changes in the
Consumer Price Index (CPI), the most commonly used measure of
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
. When the CPI rises, the principal is adjusted upward; if the index falls, the principal is adjusted downwards. The adjustments to the principal increase interest income when the CPI rises, thus protecting the holder's purchasing power. This "virtually guarantees" a real return over and above the rate of inflation, according to finance scholar Dr. Annette Thau.
Finance scholars Martinelli, Priaulet and Priaulet state that inflation-indexed securities in general (including those used in the United Kingdom and France) provide efficient instruments to diversify portfolios and manage risk because they have a weak correlation with stocks, fixed-coupon bonds and cash equivalents.
A 2014 study found that conventional U.S. Treasury bonds were persistently mispriced relative to TIPS, creating
arbitrage opportunities and posing "a major puzzle to classical
asset pricing theory."
Coupon stripping
The secondary market for securities includes T-notes, T-bonds, and TIPS whose interest and principal portions of the security have been separated, or "stripped", in order to sell them separately. The practice derives from the days before computerization, when treasury securities were issued as paper
bearer bond
A bearer bond is a bond or debt security issued by a business entity such as a corporation or a government. As a bearer instrument, it differs from the more common types of investment securities in that it is unregistered—no records are kept o ...
s; traders would literally separate the interest coupons from paper securities for separate resale, while the principal would be resold as a
zero-coupon bond
A zero coupon bond (also discount bond or deep discount bond) is a bond in which the face value is repaid at the time of maturity. Unlike regular bonds, it does not make periodic interest payments or have so-called coupons, hence the term zero- ...
.
The modern versions are known as Separate Trading of Registered Interest and Principal Securities (STRIPS). The Treasury does not directly issue STRIPS – they are products of investment banks or brokerage firms – but it does register STRIPS in its book-entry system. STRIPS must be purchased through a broker, and cannot be purchased from TreasuryDirect.
Nonmarketable securities
U.S. savings bonds
Savings bonds were created in 1935, and, in the form of
Series E bond
Series E United States Savings Bonds were government bonds marketed by the United States Department of the Treasury as war bonds during World War II from 1941 to 1945. After the war, they continued to be offered as retail investments until 1980, ...
s, also known as war bonds, were widely sold to finance
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposing ...
. Unlike Treasury Bonds, they are not marketable, being redeemable only by the original purchaser (or beneficiary in case of death). They remained popular
after the end of WWII, often used for personal savings and given as gifts. In 2002, the Treasury Department started changing the savings bond program by lowering interest rates and closing its marketing offices. As of January 1, 2012, financial institutions no longer sell paper savings bonds.
Savings bonds are currently offered in two forms, Series EE and Series I bonds. Series EE bonds pay a fixed rate but are guaranteed to pay at least double the purchase price when they reach initial maturity at 20 years; if the compounded interest has not resulted in a doubling of the initial purchase amount, the Treasury makes a one-time adjustment at 20 years to make up the difference. They continue to pay interest until 30 years.
[TreasuryDirect Savings Bond Rate Press Release](_blank)
/ref>
Series I bonds have a variable interest rate that consists of two components. The first is a fixed rate which will remain constant over the life of the bond; the second component is a variable rate reset every six months from the time the bond is purchased based on the current inflation rate as measured by the Consumer Price Index for urban consumers (CPI-U) from a six-month period ending one month prior to the reset time. New rates are published on May 1 and November 1 of every year. During times of deflation the negative inflation rate can wipe out the return of the fixed portion, but the combined rate cannot go below 0% and the bond will not lose value. Series I bonds are the only ones offered as paper bonds since 2011, and those may only be purchased by using a portion of a federal income tax refund.
Zero-Percent Certificate of Indebtedness
The "Certificate of Indebtedness" (C of I) is issued only through the TreasuryDirect
TreasuryDirect is a website run by the Bureau of the Fiscal Service under the United States Department of the Treasury that allows US individual investors to purchase treasury securities, such as savings bonds, directly from the US government ...
system. It is an automatically renewed security with one-day maturity that can be purchased in any amount up to $1000, and does not earn interest. An investor can use Certificates of Indebtedness to save funds in a TreasuryDirect account for the purchase of an interest-bearing security.
Government Account Series
The Government Account Series is the principal form of intragovernmental debt holdings. The government issues GAS securities to federal departments and federally-established entities like the Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
that have excess cash.
State and Local Government Series
The State and Local Government Series (SLGS) is issued to government entities below the federal level which have excess cash that was obtained through the sale of tax-exempt bonds. The federal tax code generally forbids investment of this cash in securities that offer a higher yield than the original bond, but SLGS securities are exempt from this restriction. The Treasury issues SLGS securities at its discretion and has suspended sales on several occasions to adhere to the federal debt ceiling
The United States debt ceiling or debt limit is a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the federal government may pay on the debt they already borrowed. The ...
.
Holdings
Domestic
In June 2021 approximately $20.9 trillion of outstanding Treasury securities, representing 74% of the public debt, belonged to domestic holders. Of this amount $6.2 trillion or 22% of the debt was held by agencies of the federal government itself. These intragovernmental holdings
In public finance, intragovernmental holdings (also known as intragovernmental debt or intragovernmental obligations) are debt obligations that a government owes to its own agencies. These agencies may receive or spend money unevenly throughout ...
function as time deposits of the agencies' excess and reserve funds to the Treasury. The Federal Reserve Bank of New York was also a significant holder as the market agent of the Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
system, with $5.6 trillion or roughly 20%. Other domestic holders included mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...
s ($3.4 trillion), banks ($1.4 trillion), state and local governments ($1.7 trillion), private pension funds ($401 billion), insurers ($416 billion) and assorted private entities and individuals ($1.8 trillion, including $145 billion in Savings Bonds).
International
As of June 30, 2021, the top foreign holders of U.S. Treasury securities are:
See also
* Chiasso financial smuggling case
* Consol
* Government debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
* Interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
* Risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environm ...
* Strong dollar policy
* War bond
War bonds (sometimes referred to as Victory bonds, particularly in propaganda) are debt securities issued by a government to finance military operations and other expenditure in times of war without raising taxes to an unpopular level. They are ...
* War savings stamps
A savings stamp is a stamp issued by a government or other body to enable small amounts of money to be saved over time to accumulate a larger capital sum. The funds accumulated may then be used to make a larger purchase such as taking out a savi ...
References
Further reading
Sarah L. Quinn. 2019.
American Bonds: How Credit Markets Shaped a Nation
'. Princeton University Press.
External links
Major Foreign Holders of U.S. Treasury Bonds
* ttp://www.kc.frb.org/Publicat/econrev/PDF/1q98Shen.pdf Features and Risks of Treasury Inflation Protection Securities
U.S. Treasury Resource Center - Treasury International Capital (TIC) System
10 Year Treasury Yield Chart
US Treasuries - Key Rates, Prices, Yields, Durations
{{Money and central banking within the contemporary United States (pre–1913)
Securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
Government finances in the United States
Government bonds issued by the United States
Interest-bearing instruments
Money market instruments