US Government Securities

9 Key excerpts on "US Government Securities"

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  eBook - ePub

  The Handbook of Financial Instruments

  • Frank J. Fabozzi(Author)
  • 2018(Publication Date)
  • Wiley

    (Publisher)

  Chapter 7 U.S. Treasury Securities

  Frank J. Fabozzi, Ph.D., CFA

  Adjunct Professor of Finance School of Management Yale University Michael J. Fleming, Ph.D.* Senior Economist Federal Reserve Bank of New York

  United States Treasury securities are direct obligations of the U.S. government issued by the Department of the Treasury. They are backed by the full faith and credit of the U.S. government and are therefore considered to be free of credit risk. Issuance to pay off maturing debt and raise needed cash has created a stock of marketable Treasuries that totaled $2.8 trillion on June 30, 2001.1 Treasuries trade in a highly liquid round-the-clock secondary market with high levels of trading activity and narrow bid-ask spreads. Despite the absence of credit risk and the high level of liquidity, an investor in a Treasury security is still subject to interest rate risk and non-U.S. investors who seek to convert payments from U.S. dollars to their local currency are exposed to currency risk. As will be explained, there are Treasury securities that are available that eliminate inflation risk and reinvestment risk.

  Treasury securities serve several important purposes in financial markets. Due to their liquidity and well-developed derivatives markets, Treasuries are used extensively to price, as well as hedge positions in, other fixed-income securities. Exemption of interest income from state and local taxes also helps make Treasuries a popular investment asset to institutions and individuals. Moreover, by virtue of their creditworthiness and vast supply, Treasuries are a key reserve asset of central banks and other financial institutions.

  TYPES OF SECURITIES

  Treasuries are issued as either discount or coupon securities. Discount securities pay a fixed amount at maturity, called face value or par value, with no intervening interest payments. Discount securities are so called because they are issued at a price below face value with the return to the investor being the difference between the face value and the issue price. Coupon securities are issued with a stated rate of interest, pay interest every six months, and are redeemed at par value (or principal value) at maturity. Coupon securities are issued at a price close to par value with the return to the investor being primarily the coupon payments received over the security’s life.

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  eBook - ePub

  The Handbook of Traditional and Alternative Investment Vehicles

  Investment Characteristics and Strategies

  • Mark J. P. Anson, Frank J. Fabozzi, Frank J. Jones(Authors)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 5

  U.S. Treasury and Federal Agency Securities

  The securities issued by the U.S. Department of the Treasury (U.S. Treasury hereafter) are called Treasury securities, Treasuries, or U.S. government securities. Because they are backed by the full faith and credit of the U.S. government, market participants throughout the world view them as having no credit risk. Hence, the interest rates on Treasury securities are the benchmark default-free interest rates.

  In this chapter, the different types of marketable Treasury securities are explained. In addition, we describe securities issues by federal agencies, entities chartered by Congress to provide funding support for the housing and agricultural sectors of the U.S. economy and specific funding projects of the U.S. government. The largest issuers are also known as government-sponsored enterprises (GSEs). GSEs are either public or government owned shareholder corporations (Fannie Mae, Freddie Mac, and Tennessee Valley Authority) or the funding entities of federally chartered bank lending systems (Federal Home Loan Banks and the Federal Farm Credit Banks). The debt of the GSEs is not guaranteed by the U.S. government.

  TREASURY SECURITIES

  Treasury securities are classified as nonmarketable and marketable securities. The former securities include savings bonds that are sold to individuals and state and local government series (SLGS) securities that are sold to state and local government issuers of tax-exempt securities. There are two types of marketable Treasury securities issued: fixed-principal securities and inflation-indexed securities.

  Advantages of investing in Treasury securities in addition to their minimal credit risk (assuming the U.S. government action in the future does not alter this perception) is that they are highly liquid and the interest paid is exempt from state and local income taxes.

  Fixed Principal Treasury Securities: Treasury Bills

  The U.S. Treasury issues two types of fixed principal securities:

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  eBook - ePub

  Investing in Fixed Income Securities

  Understanding the Bond Market

  • Gary Strumeyer(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  Chapter 9

  U.S. Treasury and Government Agency Securities

  Warren Share

  U.S. TREASURY SECURITIES

  U.S. Treasury securities are the highest-quality debt obligations available. Treasuries are direct government obligations, backed by the full faith and credit of the U.S. government. Proceeds from the sale of these securities are used by the U.S. Treasury to finance the activities of the federal government or to refund outstanding debt. Since Treasuries are generally considered to be free of credit risk, they are used as a benchmark for interest rates in the United States and around the world.

  Next to credit quality, the most important feature Treasuries offer investors is liquidity. Liquidity is the ease with which a financial asset can be converted to cash without a substantial change in price. U.S. Treasury securities trade in a large and active secondary market, supported by primary dealers and numerous institutional investors around the world. Consequently, the markets to buy and sell Treasuries are generally liquid and transparent. By transparent, I mean that current market quotations are available to investors continuously. Tax benefits are another selling point, as U.S. Treasuries are exempt from state and local taxes (but are subject to federal tax). Keep in mind, however, that for some investors this income may also be subject to the Alternative Minimum Tax (AMT).

  Treasuries are obviously not entirely free from risk. Despite having little or no credit risk, the value of Treasury securities fluctuates with changes in market interest rates (interest rate risk). The degree of price volatility will depend on many factors including the duration of the bond and the coupon size (see Chapter 2 for discussion of duration and convexity). In addition, some Treasury securities are issued with call options, providing the Treasury with an option to retire the debt prior to its stated maturity. In a volatile interest rate environment, this is a significant risk for investors. Additionally, issues affecting the underlying creditworthiness of Treasuries can surface, however rarely. In early 1996, Moody’s Investors Service threatened a possible downgrade of U.S. Treasuries, due to the failure of the U.S. Congress to raise the debt ceiling during a heated balanced budget negotiation. The gridlock subsided, but the situation provides a reminder that nothing can be taken entirely for granted, even the apparent riskless nature of U.S. Treasuries.

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  The Business of Investment Banking

  A Comprehensive Overview

  • K. Thomas Liaw(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Table 9.1 shows, the U.S. government did not raise any new cash and paid back it debt in 2000 and 2001. From 2002 to 2007, the government raised cash in the range of $150 billion to $370 billion. The amount of cash raised surged to $1.241 trillion and $1.353 trillion in 2008 and 2009 during the global financial crisis to stimulate the economy.

  Table 9.1 Issuance of Treasury Securities ($ Billions)

  At yearend 2010, the U.S. government deficit totaled $14.025 trillion, with marketable securities at $8.863 trillion and nonmarketable securities at $4.634 trillion. Marketable Treasury bills outstanding were $1.772 trillion, Treasury notes outstanding were $5.571 trillion, Treasury bonds outstanding were $0.892 trillion, and Treasury inflation indexed securities were $0.616 trillion. The deficit continued to increase and reached the debt ceiling by August 2011, forcing Congress to consider raising the limit. Those securities are issued through regular auctions.

  Government Securities

  Four types of government securities trade in the securities markets:

  1. Treasury bills are short-term securities with a maturity period of up to one year. Currently, the Treasury Department issues 4-week, 13-week, 26-week, and 52-week bills. These bills are discount instruments; they do not pay coupon interest. Holders of the bills receive the face amount at maturity.
  2. Treasury notes are medium-term securities that have a maturity of between 2 and 10 years. Currently, the Treasury issues notes with a maturity period of 2, 3, 5, 7, or 10 years. The 10-year note is the current interest rate benchmark.
  3. Treasury bonds are long-term securities with a maturity period of 30 years. Notes and bonds pay coupons every six months; hence they are also called coupon Treasury securities (or coupon Treasuries).
  4. Treasury Inflation Protection Securities (TIPS) are inflation-indexed notes and bonds; the interest rate is fixed, but the principal is adjusted for inflation. At maturity, holders will receive the greater of the par amount at original issue or the inflation-adjusted principal.

  These securities are sold through regularly scheduled auctions. The auction frequency is summarized in Table 9.2

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  Debt Markets and Analysis

  • R. Stafford Johnson(Author)
  • 2013(Publication Date)
  • Bloomberg Press

    (Publisher)

  Today, the U.S. Treasury is the largest debt issuer in the world. Its size, as well as its wide distribu- tion of ownership and low default feature, makes the rates on Treasury securities the benchmark for all other securities. In addition to U.S. Treasury securities, there are also debt instruments issued by U.S. federal agencies, and a large market for the securities of municipal govern- ments. In the United States, it is estimated that there are as many as 80,000 state, county, and municipal governments and government authorities (agencies created by the government with the authority to float bonds). 1 Over the last 30 years, there has been a significant increase in borrowing by these governments and authorities, with the debt being financed primarily through the sale of municipal securities. In this chapter, we extend our analysis of securities by examining the types and markets for securities issued by the U.S. Treasury, U.S. agencies, and municipal governments, as well as government securities issued by other sovereign countries. 320 Debt Markets and Securities Treasury Securities and Markets The U.S. Treasury is responsible for implementing the fiscal policy of the federal gov- ernment and managing the federal government’s enormous debt. In 2010, the federal government raised over $2.3326 trillion in revenue from income, social insurance, and corporate taxes, and it spent over $3.5911 trillion on welfare and individual se- curity programs (Social Security, health care, and income security programs), national defense, interest on the federal government debt, physical resources (energy, com- merce and housing, transportation, and regional development) and other expendi- tures. The government’s excess of expenditures over revenue in 2010 equated to a deficit of $1.2584 trillion.

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  Financial Markets & Institutions

  • Jeff Madura(Author)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  118 Part 3: Debt Security Markets ■ ■ Federal funds ■ ■ Banker’s acceptances Each of these instruments is described in this section. 6-1a Treasury Bills When the U.S. government needs to borrow funds, the U.S. Treasury frequently issues short- term securities known as Treasury bills. The Treasury issues T-bills with 4-week, 13 -week, and 26-week maturities on a weekly basis. It periodically issues T-bills with terms shorter than 4 weeks, which are called cash management bills. It also issues T-bills with a 1 -year maturity on a monthly basis. Treasury bills were formerly issued in paper form but are now maintained electronically. Investors in Treasury Bills Depository institutions commonly invest in T-bills so that they can retain a portion of their funds in assets that can easily be liquidated if they suddenly need to accommodate deposit withdrawals. Other financial institutions invest in T-bills in case they need cash because their cash outflows exceed their cash inflows. Individuals with substantial savings invest in T-bills for liquidity purposes. Many individuals invest in T-bills indirectly by investing in money market funds, which in turn purchase large amounts of T-bills. Corporations invest in T-bills so that they have easy access to funding if they suddenly incur unanticipated expenses. Credit Risk of Treasury Bills Treasury bills are attractive to investors because they are backed by the federal government and, therefore, are virtually free of credit (default) Exhibit 6.1 How Money Markets Facilitate the Flow of Funds Households, Corporations, and Government Agencies That Have Short-Term Funds Available U.S. Treasury Corporations Financial Intermediaries Households Spending on Government Programs Spending to Support Existing Business Operations or Expansion Spending on Cars, Homes, Credit Cards, etc. $ loans $ loans $ to Buy T-bills $ to Buy Money Market Securities $ $ $ $ to Buy Money Market Securities Copyright 2021 Cengage Learning.

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  Understanding Investments

  Theories and Strategies

  • Nikiforos T. Laopodis(Author)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  What would be the implications of an actual downgrading of US debt? A downgrade would spike interest rates on Treasuries, raising the cost of borrowing throughout the economy. That is because Treasuries are considered benchmark rates upon which all other rates in the economy are based. Thus, higher interest rates could harm economic recovery. Second, an actual downgrade would have severe implications for the Chinese economy, because it is the largest holder of US debt abroad. Another consequence of a downgrade of Treasuries, according to some analysts,is that stocks could benefit from such a decline in demand from Treasuries (as bonds would be worth less if rates climbed). Of course, other analysts believe that a downgrade warning would help Treasuries because it would make them more attractive in the long run. Finally, an actual downgrade would also have implications for the risk-free security, the only one of its kind in the world, which might not attract investments from investors worldwide in times of financial turmoil and uncertainty.

  Sources : US warned on debt load, Wall Street Journal , April 19, 2011; US bond downgrade would help stocks, hurt bonds, Denver Post , April 19, 2011; How S&P’s warning could actually help US debt, Associated Press , April 25, 2011.

   

  KEY CONCEPTS

  A fixed-income security is one that pays an even specified amount (cash flow) over a predetermined period.

  A bond is a promissory note (security) that obliges the issuer to make specific payments to its holder during a specified period.

  The indenture is the contract of the bond.

  Treasury inflation -protected securities are marketable securities whose principal is adjusted for changes in inflation.

  Eurobonds are bonds issued in one currency but sold in other markets at that currency. A sovereign bond

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  Modeling Monetary Economies

  • Bruce Champ, Scott Freeman, Joseph H. Haslag(Authors)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  Part III Government Policy Chapter 16 Deficits and the National Debt Roadmap The models we have presented to this point have had a government creating fiat money and taxing or providing transfers to people in the economy. Although these are important aspects of government finance in today’s world, we have neglected one critical factor. Governments frequently finance current deficits by borrowing. In this chapter, we ask two questions. First, what gain is there to the government from having multiple types of financial securities? The answer is simple: with different types of people, the combined government – that is, the central bank and the treasury – can use price discrimination to raise more revenue. Second, what effect does the existence of national debt – which is treated as a perfect substitute for capital – have on equilibrium outcomes? We focus on two: the effects that national debt has on government revenue and the effect of monetary policy on the national debt. 16.1 High-Denomination Government Debt We observe in most of today’s economies that governments often issue two forms of debt – assets held by the public – one called money (e.g., currency) and one called government bonds (e.g., Treasury bills). Although they seem equally safe and negotiable, they have different returns. The net nominal return on currency is zero, whereas that on Treasury bills held to maturity is positive. Clearly, Treasury bills dominate currency in return. Why would anyone hold currency if an equally safe asset offers a higher return? What difference in the nature of these two assets can explain the observed disparity in returns? One difference in the two assets is the denominations in which they are offered. Currency is issued in small denominations easily usable in exchange, whereas 305 306 16 Deficits and the National Debt Treasury bills are supplied only in large denominations.

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  Bond and Money Markets

  Strategy, Trading, Analysis

  • Moorad Choudhry(Author)
  • 2003(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  The prices of GNMA mortgage-backed securities were between 16/32nds to 20/32nds higher, compared to agency issues, at the end the week in question. In Figures 12.5 and 12.6 we show the yield curves for Treasury securities and agency securities in April 2000 and April 1995. The change in yield spreads is apparent. This story highlights two important points. First, the government guarantee of agency securities has always been implicit, and in times of investor unease or loss of confidence will not be regarded as highly as it is in times of investor confidence. The view of the Treasury – that agency bonds are not explicitly government guaranteed – has been known for some time, whereas the government itself, as represented by say, certain members of the US Congress, may feel that the guarantee is more explicit. Secondly, it shows that both alternative benchmarks to the government bond, agency securities and the swap curve, react in a volatile fashion to market events in a way that indicates that the market does not believe them to be wholly satisfactory benchmarks. In a way though, the markets reaction can also be taken to indicate the enhanced role of agency securities in the US debt market, at a time when Treasury securities are in ever shorter supply. The issue of an orderly benchmark in debt capital markets is a topical one in countries around the world, as decreasing budget deficits result in a lower supply of government bonds. The gilt yield curve in the United Kingdom has been inverted during the three years from July 1997 and this is mainly ascribed to a shortage of stock at the long end. As well as suggesting alternative benchmarks such as agency securities and the swap curve, 269 Chapter 12: The US Treasury Bond Market 12.10 Derivatives markets Trading in cash Treasury securities takes place around the world, although the centre of the cash market could be said to be in New York where the primary dealers have their offices.

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