How are Treasury securities bought and sold?
How does Treasury sell marketable securities?
Treasury sells bills,Treasury bills are short-term securities that mature in 1 year or less from their issue date. Investors usually pay less than the bills' par or face value (though Treasury may also issue bills at par), and when bills mature, they receive the par or face value. For example, a $1,000 bill might sell at auction for $980. When the bill matures, the investor receives the face value, in this case $1,000. The difference ($20) equals the interest earned. notes,Treasury notes are securities that pay a fixed rate of interest every 6 months until they mature, which is when they pay their par value. They are issued either at par value or an amount that reflects a discount or a premium. Treasury notes mature in more than 1 year, but not more than 10 years, from their issue date. bonds,Treasury bonds are securities that pay a fixed rate of interest every 6 months until they mature, which is when they pay their par value. They are issued either at par value or an amount that reflects a discount or a premium. Bonds mature in more than 10 years from their issue date. TIPS,Treasury Inflation-Protected Securities (TIPS) provide protection against inflation to investors who are willing to pay a premium for this protection in the form of a lower interest rate. TIPS are issued with a term of 5 years or more. The principal increases with inflation and decreases with deflation, but does not fall below par value. TIPS pay interest semiannually at a fixed rate. The rate is applied to the adjusted principal, so interest payments rise with inflation and fall with deflation. When it matures, an investor is paid the inflation-adjusted principal or the original principal (whichever is greater), thereby also being protected against deflation. and floating rate notes Treasury floating rate notes are securities that pay a variable rate of interest—based on the interest rate at the time of payment—every 3 months until they mature. They are issued at either par value or an amount that reflects a discount or premium. When they mature, they pay their par value. Like traditional Treasury notes, Treasury floating rate notes mature in more than 1 year, but not more than 10 years, from their issue date. to institutional investors—including the Federal Reserve—and individual investors through public auctions. Auctions are the cornerstone of Treasury's strategy of regular and predictable debt management. Key features of Treasury auctions are described below.
- Auctions are announced in advance.
- There are two options for bidding: competitive and noncompetitive. Under a competitive bid, the investor specifies the yield (the rate of return) that is acceptable to him or her; that bid may or may not actually succeed in purchasing securities. In contrast, a noncompetitive bid offers an uncertain yield that depends upon the offers of competitive bidders, but does guarantee that the bidder will receive a specific amount of securities.
- At the close of the auction, Treasury accepts all noncompetitive bids that comply with the auction rules. Competitive bids are then accepted starting with the lowest yields and in order of increasing yields until Treasury reaches the amount it needs to borrow. All competitive and noncompetitive bidders will receive the same yield as the highest accepted bid.
- Auction results are posted on Treasury's webpage.
For additional information, see the Uniform Offering Circular and the Federal Reserve Bank of New York's (FRBNY) report on the auction process, The Treasury Auction Process: Objectives, Structure, and Recent Adaptations.
Primary dealers are particularly important in the distribution of Treasury securities. Primary dealers are a group of banks and securities broker/dealers selected by the FRBNY that trade in U.S. government securities with the FRBNY to implement monetary policy.The use of reserve requirements, discount rates, and purchases and sales of Treasury securities (open market operations) by the Federal Reserve (the nation's central bank) to affect the rate of growth of the nation's money supply. The goals of monetary policy are to promote maximum employment, stable prices, and moderate long-term interest rates.
All primary dealers are required to participate meaningfully in all Treasury auctions, and they generally buy the largest share of Treasury securities at auction. They then sell these securities to other investors in the secondary market.The marketplace in which marketable Treasury securities (which constitute most debt held by the public, and which can be sold by whoever owns them) are traded. For example, Treasury securities are resold by primary dealers, who purchase large amounts of Treasury securities.
At its auctions, Treasury limits each competitive bidder to bidding for no more than 35 percent of the offer amount to ensure a liquid secondary market. As of February 2017, FRBNY reports that there are 23 primary dealers. (A list of primary dealers can be found at https://www.newyorkfed.org/markets/primarydealers.html.)
How can individual investors purchase Treasury securities?
Individual investors have several options to purchase Treasury securities.
- Individual investors can purchase Treasury securities directly from the Treasury using Treasury DirectTreasury Direct is an accounting and reporting system for marketable Treasury securities held by individuals and electronic accrual savings securities. It also allows investors to purchase and redeem Treasury securities.
- Investors can also purchase securities through an investment advisor. Most marketable Treasury securitiesThe Treasury issues two major types of debt securities to the public: marketable and nonmarketable securities. Marketable securities, which consist of Treasury bills, notes, bonds, TIPS, and floating rate notes, can be resold by whoever owns them. Marketable securities are auctioned at regular intervals during the year. In contrast, nonmarketable securities (such as U.S. Savings Bonds) are registered to the owner and cannot be sold in the financial market. are sold initially to dealers and brokers for resale in the secondary market.
- Individuals may also invest in pension funds and money market accounts that purchase Treasury securities.