Treasury security

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Treasury securities are government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt. They are the debt financing instruments of the U.S. Federal government, and they are often referred to simply as Treasuries or Treasurys. 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.

Contents

[edit] Marketable Securities

[edit] Directly issued by the US Government

[edit] Treasury bill

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), and 182 days (or 26 weeks, about 6 months). Treasury Bills are sold by single price auctions held weekly. Offering amounts for 13-week and 26-week bills are announced each Thursday for auction at 1:00 pm 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, at 1:00 pm and issuance on Thursday. Purchase orders at TreasuryDirect must be entered before 11:30 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 percentage yield to maturity, or basis.

With the advent of TreasuryDirect, individuals can now purchase T-Bills online and have funds withdrawn and deposited directly to their personal bank account and earn higher interest rates on their savings.

General calculation for yield on Treasury bills is

\text{Yield} (%) = \left(\frac{\text{Face Value} - \text{Purchase Price}}{\text{Face Value}}\right) \times \frac{360}{\text{Days Till Maturity}} \times 100%

[edit] Treasury note

Treasury notes (or T-Notes) mature in two to ten years. They have a coupon payment every six months, and are commonly issued with maturities dates of 2, 5 or 10 years, for denominations from $1,000 to $1,000,000.

T-Notes and T-Bonds are quoted on the secondary market at percentage of par in thirty-seconds of a point. 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 unusual and 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.

[edit] Treasury bond

Treasury bonds (T-Bonds, or the long bond) have the longest maturity, from ten years to thirty years. They have coupon payment 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 stopped issuing the well-known 30-year Treasury bonds (often called long-bonds) on October 31, 2001. 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, due to 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 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 will bring the U.S. in line with Japan and European governments issuing longer-dated maturities amid growing global demand from pension funds. Some countries, including France and the United Kingdom, have begun offering a 50-year bond, known as a Methuselah.

[edit] TIPS

Treasury Inflation-Protected Securities (or TIPS) are the inflation-indexed bonds issued by the U.S. Treasury. These securities were first issued in 1997. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. 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, 7-year, 10-year and 20-year maturities. 30-year TIPS are no longer offered.

In addition to their value for a borrower who desires protection against inflation, TIPS can also be a useful information source for policy makers: the interest-rate differential between TIPS and conventional US Treasury bonds is what borrowers are willing to give up in order to avoid inflation risk. Therefore, changes in this differential are usually taken to indicate that market expectations about inflation over the term of the bonds have changed. (Also see inflation derivatives).

The interest payments from these securities are taxed for federal income tax purposes in the year payments are received (payments are semi-annual, or every six months). The inflation adjustment credited to the bonds is also taxable each year. This tax treatment means that even though these bonds are intended to protect the holder from inflation, the cash flows generated by the bonds are actually inversely related to inflation until the bond matures. For example, during a period of no inflation, the cash flows will be exactly the same as for a normal bond, and the holder will receive the coupon payment minus the taxes on the coupon payment. During a period of high inflation, the holder will receive the same equivalent cash flow (in purchasing power terms), and will then have to pay additional taxes on the inflation adjusted principal. The details of this tax treatment can have unexpected repercussions. (See tax on the inflation tax.)

[edit] Created by the Financial Industry

[edit] 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 $1000 face value) in the secondary market. The name derives from the notional practice of literally tearing the interest coupons off (paper) securities.

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.

[edit] Nonmarketable Securities

[edit] Zero-Percent Certificate of Indebtedness

The "Certificate of Indebtedness" is a Treasury security that does not earn any interest 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.

[edit] Series EE

Series EE bonds are issued at 50% of their face value and reach final maturity 30 years from issuance. Interest is paid semiannually and added to the current value of the bond. They are designed to reach face value in approximately 17 years although an investor can hold them for up to 30 years and continue to accrue interest. The rate of interest is recomputed every six months at 90% of the average five-year Treasury yield for the preceding six months.

Interest is taxable at the federal level only. Investors can elect to defer taxation until the bond ceases to pay interest (30 years after issuance) or until it is redeemed.

[edit] Series I Savings Bonds

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 and the second is a variable rate reset every six months from the time the bond is purchased based on the current inflation rate. New rates go into effect on May 1 and November 1 of every year.[1] The fixed rate is determined by the Treasury Department; the variable component is based on the Consumer Price Index from a six month period ending one month prior to the reset time.[2] 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. Selling the bonds before five years will incur a penalty of three months of interest.[3]

[edit] See also

[edit] References

  1. ^ I Savings Bond Historical Rates and Terms - Treasury Direct
  2. ^ How Series I Savings Bond interest rates work - Savings Bond Advisor
  3. ^ I Bonds at a Glance - Treasury Direct

[edit] External links