What factors make Treasury securities attractive to investors?
Treasury securities are attractive to investors because they are backed by the full faith and credit of the United States government, are offered in a wide range of maturities, and are exempt from state and local taxes. In addition, most of the securities offered to the public are marketable, meaning they can be resold. A small portion of securities are nonmarketable, meaning they are registered to the owner and cannot be sold in the financial market (e.g., U.S. Savings Bonds).
A key reason investors purchase Treasury securities is because they are liquid—that is, investors can easily trade the security because there are many people interested in buying and selling at any given time. Treasury securities accounted for about half or more of the trading volume in U.S. bond markets between 2000 and 2016, according to statistics from an association of securities firms, banks, and asset managers. In 2016, daily trading volume in Treasury securities averaged about $515 billion, compared to about $770 billion in total trading in U.S. bond markets. Trading volume of Treasury securities tends to remain relatively robust even during periods of financial distress such as the financial crisis in 2008 and 2009, when investors were generally uncertain about the financial condition and solvency of financial entities. This is partly due to the fact that Treasury securities are widely viewed as a "safe haven" investment.
Source: GAO analysis of data from the Securities Industry and Financial Markets Association (SIFMA).
Notes: The data refer to primary dealer activity for Treasury securities. Chart excludes non-agency mortgage-backed securities and asset-backed securities, each of which totaled about $4.2 billion in 2016. The federal agency securities category includes securities issued by both federal agencies (such as the Tennessee Valley Authority) and government-sponsored enterprises (GSEs).The federal government chartered these to provide financial intermediation for specified public purposes, such as mortgages. Examples include the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal Home Loan Banks, the Farm Credit System, and the Federal Agricultural Mortgage Corporation. Although federally chartered to serve public policy purposes, the GSEs are classified as non-budgetary and excluded from the budget. This is because they were intended to be privately owned and controlled, with any public benefits resulting from their business transactions accruing indirectly.
Why does the Federal Reserve purchase Treasury securities?
The Federal ReserveThe central bank of the United States. It is responsible for the conduct of monetary policy. buys and sells marketable Treasury securities in the secondary market to conduct monetary policyThe 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. in what are called "open market operations." The Federal Reserve adds reserves to the banking system by buying securities, and drains reserves from the system by selling securities. Open market operations generally target the federal funds rate—the rate at which banks lend to one another on an overnight basis—thereby influencing short-term interest rates. The Federal Reserve typically purchases short-term Treasury securities for this purpose. During the financial crisis in 2008 and 2009, the Federal Reserve also began purchasing longer term Treasury securities in an effort to spur economic growth and other financial instruments to stabilize financial markets.
Treasury securities are attractive for open market operations because the market for these securities is broad and highly active. Consequently, the market can accommodate the Federal Reserve's transactions without disruption. The Federal Reserve Bank of New York posts information about the security holdings acquired via open market operations.