There are three major types of U.S. Treasury securities: bills, notes, and BONDS. In financial markets they are referred to as T-bills, T-notes, and T-bonds. The U.S. Treasury sells these securities on a continuing basis to finance the public (national) debt. When the government runs a budget deficit (spending more than what is taken in during a FISCAL YEAR), the U.S. Treasury sells additional securities to finance the deficit. As current Treasury securities mature, the department “rolls over” debt by selling replacement securities. Of the three types of Treasury securities, T-bills are the most important. T-bills are short-term debt with maturities of three months, six months, and one year. They are issued in denominations of $10,000, $15,000, $50,000, $100,000, $500,000, and $1 million, are generally sold to securities dealers in lots of $5 million; and are priced on a discount basis. This means T-bills pay no coupon-interest rate. Instead they are sold at a price less than the face value, with the investor receiving the difference between the price and the face value received at maturity as interest. Treasury bills are priced using a “bank discount rate,” calculated by multiplying the percentage price discount (the difference between the current price and the face value expressed as a percentage) by 360 (days) and then dividing by the number of days to maturity. For example, if a $10,000 T-bill is priced at $9,700, with 90 days until its maturity, the DISCOUNT RATE would be rd = (10,000 – 9,700 ÷ 10,000) × (360 ÷ 90) × 100 percent = 12 percent. On a regular basis, the U.S. Treasury announces its sale of 13-week and 26-week T-bills. Bids are received through the FEDERAL RESERVE SYSTEM and can be either competitive or noncompetitive. A competitive bid means the investor (lender) states the quantity of T-bills he or she want to purchase and what price he/she is bidding. The higher the price bid, the lower the interest-rate return. Likewise, the higher the bid price, the more money the government receives. In noncompetitive bids, the investor states what quantity of securities he/she wants to purchase and agrees to pay the weighted average of the competitive bids accepted. The Treasury Department then decides which competitive bids to accept, resulting in the price for noncompetitive bids; this process is called a Dutch auction. Most competitive bids are made by “primary dealers,” market intermediaries who buy and sell Treasury securities in multimilliondollar volumes. Noncompetitive bids typically are made by individuals and small commercial banks. In the 1970s, the Treasury Department stopped issuing physical securities, replacing them with a book-entry system, recorded in the Federal Reserve’s computer records. Trading these securities is then a matter of electronic transfer of the security from one account to another. T-notes and T-bonds are longer-term securities issued with coupon rates of interest. T-notes and T-bonds, like corporate bonds, are issued in $1,000 denominations. Tnotes have maturities of 1–10 years, and T-bonds have maturities over 10 years. In recent years, T-notes and Tbonds have become less important, as the Treasury Department has financed most public debt using T-bills. With the decline in the public debt, in 2001 the Treasury Department announced it would eliminate the benchmark 30- year Treasury bond. Like T-bills, longer-term Treasury securities are sold through auctions but with less frequency than T-bills. In addition to the three major types of Treasury securities, there are also savings bonds and inflation-indexed Tnotes and T-bonds. Savings bonds have maturities up to 30 years, can be purchased directly by individuals, and can be redeemed any time after 6 months. In the late 1990s, the Treasury Department created inflation-indexed notes and bonds. The interest rate for these securities changes with INFLATION, as measured by the CONSUMER PRICE INDEX. Inflation- indexed securities protect investors against unexpected changes in inflation. Major securities dealers also create U.S. Treasury “strips”—securities (electronic book entries) whereby investors choose between buying the interest payments (a 10-year T-note consists of 20 payments every six months) or repayment of the principal at maturity. The second part of strips is known as a zero-coupon Treasury. Investors purchase strips coupon payments for a steady stream of income. They purchase zero-coupon Treasuries to lock in an interest rate of return for a longer period of time. The Federal Reserve is a major purchaser of Treasury securities, first as an ASSET and second for use in OPENMARKET OPERATIONS. The Fed uses the purchase and sale of Treasury securities to member banks as a means of increasing or decreasing banks’ reserves, funds available to make LOANS. This limits or expands the MONEY SUPPLY. As of January 2002, U.S. Treasury securities held by the public (much of the national debt is held by other government agencies) consisted of
• T-bills: $792 billion
• T-notes: $1,411 billion
• T-bonds: $602 billion
• Indexed T-notes and bonds: $145 billion