United States Treasury securities
Treasuries) are fixed income instruments issued by the United
States Department of Treasury. They are direct obligations of the
Federal Government, so they are considered free of
Interest income from Treasuries is taxed by the Federal
Government but not by US state or local governments. Due to their
favorable tax treatment, lack of credit risk and the fact that Treasuries
are generally not callable, Treasuries offer
below those of high-quality corporate
At any given time, there are several trillion dollars
of Treasuries outstanding. As old debt matures or federal budget deficits create a need
for additional funds, the Treasury issues new securities. Accordingly, both the primary and secondary markets for
Treasuries are large, active and highly
Treasuries are issued in various forms. By convention,
these are categorized as
bills, which are discount instruments with initial maturities of up to a
notes, which pay semiannual
coupons and have initial maturities of more
than one year and up to ten years.
bonds, which pay semiannual coupons and have initial maturities greater
than ten years.
A more recent development is
Securities (TIPS), which are coupon paying instruments with a
amount that is adjusted over time for inflation.
The primary market for Treasuries is conducted as a Dutch
auction open to the public and run by the Treasury. About 150 auctions are held a year. Most are
for bills. Notes or bonds are auctioned less frequently. The Treasury
publishes an informal long-term schedule for auctions. This is modified as the
federal government's funding needs evolve.
Some auctions are called
reopenings. At these, the treasury auctions more of a previously
issued security. For example, if a 4.25% coupon 30-year bond is issued in
a February auction, more of those same 4.25% bonds will be offered in the
August reopening. They will have the same maturity date as the previously
issued bonds, so they will have just 29.5 years to maturity when issued..
|Feb, May, Aug, Nov
|Feb, Mar*, May, Jun*,
Aug, Sep*, Nov, Dec*
|Jan, April*, July, Oct*
This table summarizes the Treasury auction
schedule as of January 2006. Reopenings are marked with an asterisk.
There are no reopenings for securities auctioned weekly or monthly.
Each auction is formally announced a few days in advance,
and the Treasury identifies a specific dollar amount to be raised. That
amount cannot change based on bids received. All bids are sealed. They can
be placed competitively or non-competitively. Non-competitive orders are
specified as an amount of securities, in units of 1,000s of dollars of
par value, to be filled at
whatever price is determined in the competitive bidding.
Competitive orders are also specified as a par amount to be purchased but
include a minimum yield the bidder is willing to accept. The Treasury
collects all competitive bids, arranges the bided yields in ascending
order, and determines the minimum yield at which it can meet the funding
requirement specified for the auction. That
stop-out yield is converted into a price, which is the price paid
by all participants whose orders are filled. Specifically, non-competitive
orders and competitive orders bid at yields lower than the stop-out yield
are filled entirely. Competitive orders bid at the stop-out yield may be
only partially filled. Remaining orders—those bid above the stop-out
yield—are not filled.
For newly issued coupon instruments, the coupon rate is set
by rounding the stop-out yield down to the nearest eighth of a percent, so
securities are always first issued at or below
par. For example, the ten-year
note maturing November 15, 2015 was first issued with a stop-out yield of
4.578. Its coupon was set at 4.500, and all bidders paid 99.379727 per 100
dollars of par value. Securities reissued in a reopening have the same
coupon as the original issue, so they may be issued above par.
Treasury securities are all held in
entry form. There is an active
OTC market for Treasuries,
typically for next day settlement.
Large financial institutions act as dealers, buying from or selling to
their clients. Those that the New York Federal Reserve transacts with in
its open market operations are called
securities dealers (or primary dealers).
In exchange for the Fed's business, primary dealers are
expected to participate meaningfully in Treasury auctions, provide the Fed
a reasonable bid-offer spread on
open market transactions, and be a source of market
intelligence for the Fed. There are usually about twenty-five primary
dealers, and they dominate the secondary market.
ABN AMRO Bank, N.V.
BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital, Inc.
Bear, Stearns & Co., Inc.
CIBC World Markets Corp.
Citigroup Global Markets, Inc.
Countrywide Securities Corp.
Credit Suisse First Boston LLC
Daiwa Securities America, Inc.
Deutsche Bank Securities, Inc.
Dresdner Kleinwort Wasserstein
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA), Inc.
J. P. Morgan Securities, Inc.
Lehman Brothers, Inc.
Merrill Lynch Government Securities, Inc.
Mizuho Securities USA, Inc.
Morgan Stanley & Co. Inc.
Nomura Securities International, Inc.
UBS Securities LLC.
Primary dealers as of January 2006.
Source: Federal Reserve Bank of New York.
Dealers trade with one another through interdealer
brokers, including BrokerTec, Cantor Fitzgerald, Garban-Intercapital,
Hilliard Farber, and Tullett & Tokyo Liberty. Brokers provide dealers with
proprietary screens that indicate best bids and offers available from
other dealers as well as recent transaction details. The system is
anonymous. A dealer who transacts at one of the displayed bids or offers
pays the broker a modest fee.
The majority of secondary transactions are for
on-the-run securities. These are Treasuries
issued in the most recent auction. Typically, dealers have acquired large
holdings in that auction and are selling them to clients. Securities
issued in earlier auctions are called off-the-run.
There is less liquidity for off-the-run securities, and they trade at
modestly lower prices.
Treasuries also trade in the secondary market during the
days leading up to their auction. These are called
when-issued securities. The
trades are forward transactions to
be settled the same day the
securities are issued. When-issued trading provides price transparency in
anticipation of the auction. Also, by allowing dealers to advance-sell
securities to clients, it reduces the risk
they take in bidding on large blocks of securities in the auction.