Treasury security
Encyclopedia
A United States Treasury security is government debt
issued by the United States Department of the Treasury
through the Bureau of the Public Debt
. Treasury securities
are the debt
financing instruments of the United States federal government
, and they are often referred to simply as Treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). There are several types of non-marketable treasury securities including State and Local Government Series (SLGS), Government Account Series debt issued to government-managed trust funds, and savings bonds. All of the marketable Treasury securities are very liquid
and are heavily traded on the secondary market
. The non-marketable securities (such as savings bonds) are issued to subscribers and cannot be transferred through market sales.
would be great, and the question of how to pay for the war was a matter of intense debate. The resulting decision was to pay for the war with a balance between higher taxes (see the War Tax Act
) and government debt. Traditionally, the government borrowed from other countries, but there were no other countries from which to borrow in 1917: U.S. citizens would have to fully finance the war through both higher taxes and purchases of war bonds
.
The Treasury raised funding throughout the war by selling $21.5 billion in 'Liberty bond
s.' These bonds were sold at subscription where officials created coupon price and then sold it at Par value
. 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. The resolution to this problem was to refinance 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 oversubscription, where interest rates were so attractive that there were more purchasers of debt than supplied 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 U.S. Treasury shifted from the fixed-price subscription system to a system of auction
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 to set the price rather than the government. 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.
Foreign countries later started to buy U.S. debt as an investment of their surplus U.S. Dollars. There is fear that foreign countries hold so many bonds that if they stopped buying them, the U.S. economy would collapse; however, the reality is that more bonds are transferred in a single day by the Treasury than are held by any single sovereign state. The perception of this dependence furthers belief that the U.S. and China economies are so tightly linked that both fear the consequences of a potential slow down in China's purchase of those bonds. In her 2010 visit to China, the U.S. Secretary of State Hillary Clinton called on authorities in Beijing to continue buying U.S. Treasuries, saying it would help jumpstart the flagging U.S. economy and stimulate imports of Chinese goods.
As the economic recession continues, more doubts arise over the real value of U.S. treasury securities. Though carefully worded, Chinese premier Wen Jia Bao's warning about possible devaluation of Chinese held U.S. bonds was taken very seriously by Washington:
However, it is important to note that such comments, while critical, were very likely indicative of Chinese "gesturing" ahead of the April 1st G-20 Economic Summit. As of April 2009, the U.S. dollar had rallied YTD
against all other major world currencies.
On March 18, 2009, the Federal Reserve used quantitative easing
"to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."
Treasury bills (or T-Bills) mature
in one year or less. Like zero-coupon bonds, they do not pay interest
prior to maturity; instead they are sold at a discount of the par value
to create a positive yield to maturity
. Many regard Treasury bills as the least risky investment available to U.S. investors.
Regular weekly T-Bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year). Treasury bills are sold by single-price auction
s held weekly. Offering amounts for 13-week and 26-week bills are announced each Thursday for auction, usually at 11:30 a.m., on the following Monday and settlement, or issuance, on Thursday. Offering amounts for 4-week bills are announced on Monday for auction the next day, Tuesday, usually at 11:30 a.m., and issuance on Thursday. Offering amounts for 52-week bills are announced every fourth Thursday for auction the next Tuesday, usually at 11:30 am, and issuance on Thursday. Purchase orders at TreasuryDirect
must be entered before 11:00 on the Monday of the auction. The minimum purchase, effective April 7, 2008, is $100. (This amount formerly had been $1,000.) Mature T-bills are also redeemed on each Thursday. Banks and financial institutions, especially primary dealers
, are the largest purchasers of T-bills.
Like other securities, individual issues of T-bills are identified with a unique CUSIP
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 (or CMBs). These are sold at a discount and by auction just like weekly Treasury bills. They differ in that they are irregular in amount, term (often less than 21 days), and day of the week for auction, issuance, and maturity. When CMBs mature on the same day as a regular weekly bill, usually Thursday, they are said to be on-cycle. The CMB is considered another reopening of the bill and has the same CUSIP. When CMBs mature on any other day, they are off-cycle and have a different CUSIP number.
Treasury bills are quoted for purchase and sale in the secondary market on an annualized discount percentage, or basis
.
With the advent of TreasuryDirect
, individuals can now purchase T-Bills online and have funds withdrawn from and deposited directly to their personal bank account and earn higher interest rates on their savings.
General calculation for the discount yield for Treasury bills is
Treasury notes (or T-Notes) mature in one to ten years. They have a coupon payment
every six months, and are commonly issued with maturities dates between 1 to 10 years, with denominations of $1,000. In the basic transaction, one buys a "$1,000" T-Note for say, $950, collects interest over 10 years of say, 3% per year, which comes to $30 yearly, and at the end of the 10 years cashes it in for $1000. So, $950 over the course of 10 years becomes $1300.
T-Notes and T-Bonds are quoted on the secondary market at percentage of par in thirty-seconds of a point (n/32 of a point, where n = 1,2,3,...). Thus, for example, a quote of 95:07 on a note indicates that it is trading at a discount: $952.19 (i.e., 95 + 7/32%) for a $1,000 bond. (Several different notations may be used for bond price quotes. The example of 95 and 7/32 points may be written as 95:07, or 95-07, or 95'07, or decimalized as 95.21875.) Other notation includes a +, which indicates 1/64 points and a third digit may be specified to represent 1/256 points. Examples include 95:07+ which equates to (95 + 7/32 + 1/64) and 95:073 which equates to (95 + 7/32 + 3/256). Notation such as 95:073+ is not typically used.
The 10-year Treasury note has become the security most frequently quoted when discussing the performance of the U.S. government bond market and is used to convey the market's take on longer-term macroeconomic expectations.
every six months like T-Notes, and are commonly issued with maturity of thirty years. The secondary market is highly liquid, so the yield on the most recent T-Bond offering was commonly used as a proxy for long-term interest rates in general. This role has largely been taken over by the 10-year note, as the size and frequency of long-term bond issues declined significantly in the 1990s and early 2000s.
The U.S. Federal government suspended issuing the well-known 30-year Treasury bonds (often called long-bonds) for a four and a half year period starting October 31, 2001 and concluding February 2006. As the U.S. government used its budget surpluses to pay down the 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 fund
s and large, long-term institutional investor
s, along with a need to diversify the Treasury's liabilities - and also because the flatter yield curve
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. This brought the U.S. in line with Japan
and European
governments issuing longer-dated maturities amid growing global demand from pension funds.
s issued by the U.S. Treasury. The principal is adjusted to the Consumer Price Index
(CPI), the commonly used measure of inflation
. When the CPI rises, the principal adjusts upward. If the index falls, the principal adjusts downwards. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against inflation. TIPS are currently offered in 5-year, 10-year and 30-year maturities.
policy, the Fed's holding of US treasuries increased from $750 billion in 2007 to over $1.5 trillion by June 2011. Source Federal Reserve Bank of Cleveland.
Luxembourg holds with approximately 500,000 inhabitants $172,800 per capita of U.S. Treasury securities. In comparison, Germany holds only $747 per capita.
The government does not directly issue STRIPS; they are formed by investment banks or brokerage firms, but the government does register STRIPS in its book-entry system. They cannot be bought through TreasuryDirect, but only through a broker.
STRIPS are used by the Treasury and split into individual principal and interest payments, which get resold in the form of zero-coupon bonds. Because they then pay no interest, there is not any interest to re-invest, and so there is no reinvestment risk with STRIPS.
and has no fixed maturity. It can only be held in a TreasuryDirect account and bought or sold directly through the Treasury. It is intended to be used as a source of funds for traditional Treasury security purchases. Purchases and redemptions can be made at any time.
, and were originally called Liberty Bonds. Unlike Treasury Bonds, they are not marketable. In 2002, the Treasury Department started changing the savings bond program by lowering interest rates and closing its marketing offices. As of January 2011, Treasury stopped mailing paper bonds through payroll deduction programs in favor of individuals buying bonds online. As of January 1, 2012, Treasury will no longer sell paper savings bonds.
Like EE bonds, I-bonds are issued to individuals with a limit of $5,000 per person (by Social Security number
) per year. A person may purchase the limit of both paper and electronic bonds for a total of $10,000 per year. Redeeming the bonds before five years will incur a penalty of three months of interest. The fixed portion of the rate has varied from as much as 3.6% to 0% (0% in February 2011 while the inflation portion was 0.74% per year). During times of deflation (during part of 2009), the negative inflation portion can wipe out the return of the fixed portion, but the combined rate cannot go below 0% and the bond will not lose value.
Besides being available for purchase at financial institutions and online, tax payers may purchase I-bonds using a portion of their 2010 tax refund via IRS Form 8888 Allocation of Refund. Bonds purchased using Form 8888 are issued as paper bonds and mailed to the address listed on the tax return. Tax payers may purchase bonds for themselves or other persons such as children or grandchildren. The remainder of the tax payer's refund may be received by direct deposit or check.
Government bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...
issued by the United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
through the Bureau of the Public Debt
Bureau of the Public Debt
The Bureau of the Public Debt is an agency within the Fiscal Service of the United States Treasury Department. Under authority derived from Article I, section 8 of the Constitution, Public Debt is responsible for borrowing the money needed to operate the federal government, and is where donations...
. Treasury securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
are the debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
financing instruments of the United States federal government
Federal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
, and they are often referred to simply as Treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). There are several types of non-marketable treasury securities including State and Local Government Series (SLGS), Government Account Series debt issued to government-managed trust funds, and savings bonds. All of the marketable Treasury securities are very liquid
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
and are heavily traded on the secondary market
Secondary market
The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....
. The non-marketable securities (such as savings bonds) are issued to subscribers and cannot be transferred through market sales.
History
The U.S. government knew that the costs of World War IWorld War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
would be great, and the question of how to pay for the war was a matter of intense debate. The resulting decision was to pay for the war with a balance between higher taxes (see the War Tax Act
War Revenue Act of 1917
The United States War Revenue Act of 1917 greatly increased federal income tax rates while simultaneously lowering exemptions.The 2% bracket had previously applied to income below $20,000. That amount was lowered to $2,000...
) and government debt. Traditionally, the government borrowed from other countries, but there were no other countries from which to borrow in 1917: U.S. citizens would have to fully finance the war through both higher taxes and purchases of war bonds
War bond
War bonds are debt securities issued by a government for the purpose of financing military operations during times of war. War bonds generate capital for the government and make civilians feel involved in their national militaries...
.
The Treasury raised funding throughout the war by selling $21.5 billion in 'Liberty bond
Liberty bond
A Liberty Bond 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 financial securities to many citizens for the first time. The Act of Congress which...
s.' These bonds were sold at subscription where officials created coupon price and then sold it at Par value
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
. 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. The resolution to this problem was to refinance 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 oversubscription, where interest rates were so attractive that there were more purchasers of debt than supplied 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 U.S. Treasury shifted from the fixed-price subscription system to a system of auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
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 to set the price rather than the government. 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.
Foreign countries later started to buy U.S. debt as an investment of their surplus U.S. Dollars. There is fear that foreign countries hold so many bonds that if they stopped buying them, the U.S. economy would collapse; however, the reality is that more bonds are transferred in a single day by the Treasury than are held by any single sovereign state. The perception of this dependence furthers belief that the U.S. and China economies are so tightly linked that both fear the consequences of a potential slow down in China's purchase of those bonds. In her 2010 visit to China, the U.S. Secretary of State Hillary Clinton called on authorities in Beijing to continue buying U.S. Treasuries, saying it would help jumpstart the flagging U.S. economy and stimulate imports of Chinese goods.
As the economic recession continues, more doubts arise over the real value of U.S. treasury securities. Though carefully worded, Chinese premier Wen Jia Bao's warning about possible devaluation of Chinese held U.S. bonds was taken very seriously by Washington:
"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried" ...
"I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."
- Chinese premier, Wen JiabaoWen JiabaoWen Jiabao is the sixth and current Premier and Party secretary of the State Council of the People's Republic of China, serving as China's head of government and leading its cabinet. In his capacity as Premier, Wen is regarded as the leading figure behind China's economic policy...
, said at a news conference after the closing of China's 2009 legislative session.
However, it is important to note that such comments, while critical, were very likely indicative of Chinese "gesturing" ahead of the April 1st G-20 Economic Summit. As of April 2009, the U.S. dollar had rallied YTD
Year-To-Date
Year-to-date is a period, starting from the beginning of the current year, and continuing up to the present day. The year usually starts on January 1 , but depending on purpose, can start also on July 1, April 1 , and April 6...
against all other major world currencies.
On March 18, 2009, the Federal Reserve used quantitative easing
Quantitative easing
Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
"to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."
Treasury bill
- "Treasury bill" redirects here. Note that the Bank of EnglandBank of EnglandThe Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
issues these in the United Kingdom.
Treasury bills (or T-Bills) mature
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
in one year or less. Like zero-coupon bonds, they do not pay interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
prior to maturity; instead they are sold at a discount of the par value
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
to create a positive yield to maturity
Yield to maturity
The Yield to maturity or redemption yield of a bond or other fixed-interest security, such as gilts, is the internal rate of return earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments...
. Many regard Treasury bills as the least risky investment available to U.S. investors.
Regular weekly T-Bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year). Treasury bills are sold by single-price auction
Single-price auction
Single-price auctions are a pricing method in securities auctions that give all participants to the issue the same purchase price.-U.S. Treasury Auctions:United States Treasury security auctions are conducted using the single-price auction method...
s held weekly. Offering amounts for 13-week and 26-week bills are announced each Thursday for auction, usually at 11:30 a.m., on the following Monday and settlement, or issuance, on Thursday. Offering amounts for 4-week bills are announced on Monday for auction the next day, Tuesday, usually at 11:30 a.m., and issuance on Thursday. Offering amounts for 52-week bills are announced every fourth Thursday for auction the next Tuesday, usually at 11:30 am, and issuance on Thursday. Purchase orders at TreasuryDirect
TreasuryDirect
TreasuryDirect is a website run by the United States Treasury that allows US individual investors to purchase Treasury securities such as T-Bills and others directly from the U.S. government...
must be entered before 11:00 on the Monday of the auction. The minimum purchase, effective April 7, 2008, is $100. (This amount formerly had been $1,000.) Mature T-bills are also redeemed on each Thursday. Banks and financial institutions, especially primary dealers
Primary dealers
Primary dealer is a formal designation of a firm as a market maker of government securities. Primary dealer systems are present in many countries including Canada, France, Italy, Spain, the United Kingdom, and the United States...
, are the largest purchasers of T-bills.
Like other securities, individual issues of T-bills are identified with a unique CUSIP
CUSIP
The acronym CUSIP historically refers to the Committee on Uniform Security Identification Procedures, which was founded in 1964, during the paper crunch in Wall Street. This 9-character alphanumeric code identifies any North American security for the purposes of facilitating clearing and settlement...
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 (or CMBs). These are sold at a discount and by auction just like weekly Treasury bills. They differ in that they are irregular in amount, term (often less than 21 days), and day of the week for auction, issuance, and maturity. When CMBs mature on the same day as a regular weekly bill, usually Thursday, they are said to be on-cycle. The CMB is considered another reopening of the bill and has the same CUSIP. When CMBs mature on any other day, they are off-cycle and have a different CUSIP number.
Pricing & Quotation
Treasury bills are quoted for purchase and sale in the secondary market on an annualized discount percentage, or basis
Cost basis
Basis , as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/ taxes on a capital gain/ that equals the amount realized on the sale minus the sold property's basis.The taxpayer deserves a tax-free...
.
With the advent of TreasuryDirect
TreasuryDirect
TreasuryDirect is a website run by the United States Treasury that allows US individual investors to purchase Treasury securities such as T-Bills and others directly from the U.S. government...
, individuals can now purchase T-Bills online and have funds withdrawn from and deposited directly to their personal bank account and earn higher interest rates on their savings.
General calculation for the discount yield for Treasury bills is
Treasury note
- This is the modern usage of "Treasury Note" in the U.S., for the earlier meanings see Treasury Note (disambiguation)Treasury Note (disambiguation)Treasury Note may refer to any of the following obligations of the United States or United Kingdom.Most commonly it refers to Treasury Note, debt obligations currently issued by the Treasury which mature in 1 to 10 years and pay coupons every six months....
.
Treasury notes (or T-Notes) mature in one to ten years. They have a coupon payment
Coupon (bond)
A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and...
every six months, and are commonly issued with maturities dates between 1 to 10 years, with denominations of $1,000. In the basic transaction, one buys a "$1,000" T-Note for say, $950, collects interest over 10 years of say, 3% per year, which comes to $30 yearly, and at the end of the 10 years cashes it in for $1000. So, $950 over the course of 10 years becomes $1300.
T-Notes and T-Bonds are quoted on the secondary market at percentage of par in thirty-seconds of a point (n/32 of a point, where n = 1,2,3,...). Thus, for example, a quote of 95:07 on a note indicates that it is trading at a discount: $952.19 (i.e., 95 + 7/32%) for a $1,000 bond. (Several different notations may be used for bond price quotes. The example of 95 and 7/32 points may be written as 95:07, or 95-07, or 95'07, or decimalized as 95.21875.) Other notation includes a +, which indicates 1/64 points and a third digit may be specified to represent 1/256 points. Examples include 95:07+ which equates to (95 + 7/32 + 1/64) and 95:073 which equates to (95 + 7/32 + 3/256). Notation such as 95:073+ is not typically used.
The 10-year Treasury note has become the security most frequently quoted when discussing the performance of the U.S. government bond market and is used to convey the market's take on longer-term macroeconomic expectations.
Treasury bond
Treasury bonds (T-Bonds, or the long bond) have the longest maturity, from twenty years to thirty years. They have a coupon paymentCoupon (bond)
A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and...
every six months like T-Notes, and are commonly issued with maturity of thirty years. The secondary market is highly liquid, so the yield on the most recent T-Bond offering was commonly used as a proxy for long-term interest rates in general. This role has largely been taken over by the 10-year note, as the size and frequency of long-term bond issues declined significantly in the 1990s and early 2000s.
The U.S. Federal government suspended issuing the well-known 30-year Treasury bonds (often called long-bonds) for a four and a half year period starting October 31, 2001 and concluding February 2006. As the U.S. government used its budget surpluses to pay down the 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 fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s and large, long-term institutional investor
Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
s, along with a need to diversify the Treasury's liabilities - and also because the flatter yield curve
Yield curve
In finance, the yield curve is the relation between the interest rate and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. For example, the U.S. dollar interest rates paid on U.S...
meant that the opportunity cost
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
of selling long-dated debt had dropped - the 30-year Treasury bond was re-introduced in February 2006 and is now issued quarterly. This brought the U.S. in line with Japan
Economy of Japan
The economy of Japan, a free market economy, is the third largest in the world after the United States and the People's Republic of China, and ahead of Germany at 4th...
and European
Economy of Europe
The economy of Europe comprises more than 731 million people in 48 different states. Like other continents, the wealth of Europe's states varies, although the poorest are well above the poorest states of other continents in terms of GDP and living standards. The difference in wealth across...
governments issuing longer-dated maturities amid growing global demand from pension funds.
TIPS
Treasury Inflation-Protected Securities (or TIPS) are the inflation-indexed bondInflation-indexed bond
Inflation-indexed bonds are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment. The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780...
s issued by the U.S. Treasury. The principal is adjusted to the Consumer Price Index
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
(CPI), the commonly used measure of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. When the CPI rises, the principal adjusts upward. If the index falls, the principal adjusts downwards. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against inflation. TIPS are currently offered in 5-year, 10-year and 30-year maturities.
Federal Reserve holdings of U.S. Treasuries
For the quantitative easingQuantitative easing
Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
policy, the Fed's holding of US treasuries increased from $750 billion in 2007 to over $1.5 trillion by June 2011. Source Federal Reserve Bank of Cleveland.
Top Foreign holders of U.S. Treasuries
As of December 2010:| Holder | $US billion |
|---|---|
| 1. China | 1160.1 |
| 2. Japan | 882.3 |
| 3. United Kingdom | 272.1 |
| 4. Oil Exporters | 211.9 |
| 5. Brazil | 186.1 |
| 6. Carib Bnkng Ctrs | 168.6 |
| 7. Taiwan | 155.1 |
| 8. Russia | 151.0 |
| 9. Hong Kong | 134.2 |
| 10. Switzerland | 107.0 |
| 11. Luxembourg | 86.4 |
| 12. Canada | 76.8 |
| 13. Singapore | 72.9 |
| 14. Germany | 60.5 |
Luxembourg holds with approximately 500,000 inhabitants $172,800 per capita of U.S. Treasury securities. In comparison, Germany holds only $747 per capita.
- Source: The United States Treasury
STRIPS
Separate Trading of Registered Interest and Principal Securities (or STRIPS) are T-Notes, T-Bonds and TIPS whose interest and principal portions of the security have been separated, or "stripped"; these may then be sold separately (in units of $100 face value) in the secondary market. The name derives from the days before computerization, when paper bonds were physically traded; traders would literally tear the interest coupons off of paper securities for separate resale.The government does not directly issue STRIPS; they are formed by investment banks or brokerage firms, but the government does register STRIPS in its book-entry system. They cannot be bought through TreasuryDirect, but only through a broker.
STRIPS are used by the Treasury and split into individual principal and interest payments, which get resold in the form of zero-coupon bonds. Because they then pay no interest, there is not any interest to re-invest, and so there is no reinvestment risk with STRIPS.
Zero-Percent Certificate of Indebtedness
The "Certificate of Indebtedness" is a Treasury security that does not earn any interestInterest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
and has no fixed maturity. It can only be held in a TreasuryDirect account and bought or sold directly through the Treasury. It is intended to be used as a source of funds for traditional Treasury security purchases. Purchases and redemptions can be made at any time.
Government Account Series
Government Account Series Treasuries are the principal form of intragovernmental debt holdings. Surpluses from the Social Security Trust Fund are invested in this type of security.U.S. Savings Bonds
Savings bonds were created to finance World War IWorld War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
, and were originally called Liberty Bonds. Unlike Treasury Bonds, they are not marketable. In 2002, the Treasury Department started changing the savings bond program by lowering interest rates and closing its marketing offices. As of January 2011, Treasury stopped mailing paper bonds through payroll deduction programs in favor of individuals buying bonds online. As of January 1, 2012, Treasury will no longer sell paper savings bonds.
Series EE
Series EE bonds are issued at 50% of their face value (paper bonds only, bonds purchased online are sold at face value) and reach maturity 20 years from issuance though they continue to earn interest for a total of 30 years. Interest accrues monthly and is paid when the holder cashes the bond. For bonds issued before May 2005 the rate of interest is recomputed every six months at 90% of the average five-year Treasury yield for the preceding six months. Bonds issued in May 2005 or later pay a fixed interest rate for the life of the bond (0.6% in November 2011). At 0.6%, a $200 bond purchased for $100 would be worth less than $113 just before 20 years, but will be adjusted to the full face value of $200 at 20 years (giving it an effective rate of 3.5%) then continue to earn the fixed rate for 10 more years. In the space of a decade, interest dropped from well over 5% to 0.7% for new bonds in 2009.Series I
Series I bonds are issued at face value and have a variable yield based on inflation. The interest rate 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. New rates are published on May 1 and November 1 of every year. The fixed rate is determined by the Treasury Department (0% in November 2011); the variable component is based on the Consumer Price Index (CPI-U) from a six month period ending one month prior to the reset time (3.06% in November 2011, reflecting the CPI-U from May through October). As an example, if someone purchases a bond in February, they will lock in the current fixed rate forever, but the inflation component will be based on the rate published the previous November. In August, six months after the purchase month, the fixed rate will not change, but the inflation component will now change to the rate that was published in May. Interest accrues monthly, in full, on the first day of the month (i.e., a Savings Bond will have the same value on July 1 as on July 31, but on August 1 its value will increase for the August interest accrual).Like EE bonds, I-bonds are issued to individuals with a limit of $5,000 per person (by Social Security number
Social Security number
In the United States, a Social Security number is a nine-digit number issued to U.S. citizens, permanent residents, and temporary residents under section 205 of the Social Security Act, codified as . The number is issued to an individual by the Social Security Administration, an independent...
) per year. A person may purchase the limit of both paper and electronic bonds for a total of $10,000 per year. Redeeming the bonds before five years will incur a penalty of three months of interest. The fixed portion of the rate has varied from as much as 3.6% to 0% (0% in February 2011 while the inflation portion was 0.74% per year). During times of deflation (during part of 2009), the negative inflation portion can wipe out the return of the fixed portion, but the combined rate cannot go below 0% and the bond will not lose value.
Besides being available for purchase at financial institutions and online, tax payers may purchase I-bonds using a portion of their 2010 tax refund via IRS Form 8888 Allocation of Refund. Bonds purchased using Form 8888 are issued as paper bonds and mailed to the address listed on the tax return. Tax payers may purchase bonds for themselves or other persons such as children or grandchildren. The remainder of the tax payer's refund may be received by direct deposit or check.
Series HH
Series HH bonds have been discontinued. Unlike Series EE and I bonds, they do not increase in value, but pay interest every six months for 20 years. When they are cashed in or mature they are still worth face value. Issuance of Series HH bonds stopped as of August 31, 2004, but there are still many yet that have not matured.See also
- Chiasso financial smuggling caseChiasso financial smuggling caseThe Chiasso financial smuggling case began on June 3, 2009 near Chiasso, Switzerland , when Sezione Operativa Territoriale di Chiasso in collaboration with officers of Italian customs/financial military police detained two suspects who had attempted to enter Switzerland with a suitcase...
- Consol
- Government debtGovernment debtGovernment debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...
- InterestInterestInterest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
- RiskRiskRisk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
- War bondWar bondWar bonds are debt securities issued by a government for the purpose of financing military operations during times of war. War bonds generate capital for the government and make civilians feel involved in their national militaries...
- War savings stampsWar savings stampsThe war savings stamp was a patriotic program used by the United States Treasury to help fund participation in World War I and World War II, and was principally aimed at school-age children. Savings stamps were available in ten cent and twenty-five cent versions, and provided interest...
- Strong dollar policyStrong dollar policyThe strong dollar policy is the United States economic policy based on the assumption that a strong exchange rate of the United States dollar is in the interests of the United States and the whole world. It is said to be also driven by a desire to encourage foreign bondholders to buy more Treasury...