The U.S. Department of the Treasury is the largest issuer of bonds in the world. It issues debt securities in order to fund the activities of the U.S. government, which generally runs high budget deficits. As of 31 December 2018, the U.S. federal debt totaled slightly below US$22 trillion. Of that amount, $16.1 trillion was held by the public and $5.9 trillion was held by other entities of the federal government, mostly by the Social Security Administration.
To fund government operations, the Treasury sells securities with a variety of maturities, from four weeks to 30 years, on a regularly scheduled basis. All of these securities are sold at auction, with the lowest rates winning the bid. Investors can buy new securities directly from the Treasury through its TreasuryDirect program or through a bank or brokerage firm. Outstanding securities can be purchased through a broker. Investors can also own Treasury securities through the many mutual funds and exchange-traded funds that invest in them.
In 2018, the Treasury sold US$10.2 trillion of securities through 284 public auctions.
Bills are Treasury securities that mature in one year or less. Each week the Treasury sells four-, eight-, 13- and 26-week bills. They're all sold in denominations of $1,000, and interest and principal are paid at maturity. T-bills, as they are commonly known, are sold at a discount and investors receive the full face value at maturity. The difference between the discounted issue price and the price at maturity represents the interest.
Notes are securities that mature in one to 10 years. Interest is paid every six months. Each month the Treasury sells two-, three-, five- and seven-year notes. In addition, it sells 10-year notes every quarter. It also "reopens" the 10-year note the other eight months of the year.
The 10-year note is considered to be the Treasury's long-term "benchmark," as many other types of loans, including residential mortgage rates, are pegged against it. Likewise, U.S. corporate bonds are usually priced against the rate on the 10-year note.
The Treasury also holds quarterly auctions of 30-year bonds, its longest maturity security. Likewise, the Treasury reopens the security the other eight months of the year.
In addition, the government holds auctions of two-year floating-rate notes every quarter. The interest rate on the notes changes quarterly based on the discount rate at the Treasury's 13-week bill auction.
The Treasury also sells Treasury Inflation-Protected Securities (TIPS) that are designed to protect against inflation, as the name suggests. According to the Treasury, the principal value of a TIPS rises with inflation and falls with deflation, as measured by the Consumer Price Index. So, if inflation rises during the term, investors receive more than they paid for the TIPS at maturity. TIPS pay a fixed rate of interest twice a year.
TIPS are sold in five-, 10-, and 30-year maturities. The five- and 30-year TIPS are sold once a year while the 10-year TIPS are auctioned every six months. All are subject to reopening at other times during the year.
The U.S. Treasury Department funds government operations through the sale of debt. As of early 2019, about US$22 trillion of debt is outstanding, with about US$16.1 trillion held by the public and the remaining US$5.9 trillion held by other federal government agencies. The Treasury sells a variety of securities throughout the year, including bills, notes and bonds. The government also sells floating-rate notes and securities that are designed to protect investors from inflation.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…