Who Buys U.S. Treasuries & Why?

7.26.2016 | Who Buys U.S. Treasuries – Rusty Tweed team

What are the Main Types of Treasury Bond?
  • Treasury Bills (T-Bills) – T-Bills mature in one year or less and do not pay interest. Instead, they are sold at a discount of the par value (face value) paid out at maturity. T-Bills are sold at auction every week in increments of $100.  An individual can purchase up to $5 million per auction.
  • Treasury Notes (T-Notes) – T-Notes, by contrast, mature in two to ten years and offer a coupon or interest payment every six months. The 10 year T-Note is the Treasury most often quoted in discussions about the bond market. T-Notes are sold at auction every week in increments of $100. An individual can purchase up to $5 million per auction.
  • Treasury Bonds (T-Bonds) – T-Bonds meanwhile mature in ten to thirty years, have a coupon payment every six months and are issued quarterly. T-Bonds are sold at auction every week in increments of $100. An individual can purchase up to $5 million per auction.

Source: http://www.bargaineering.com/articles/treasury-bonds-securities-basics-explained.html

Who Buys U.S. Treasuries - Rusty Tweed team

Who Buys U.S. Treasuries?

The essential idea behind U.S. Security Treasuries, or U.S. Treasuries, is that they are one of the safest investment vehicles worldwide. If you buy stock in a company, the company could go bankrupt and your shares become worthless. When you purchase a corporate bond, the company could go bankrupt and your bonds become worthless. When you put your money into a government bond, it is “backed by the full faith and credit of the United States Government”. Indeed, this is an ironclad guarantee that your money is safe.

In the investment world, many people are looking for safe vehicles, for example, people saving money for retirement or setting aside funds for children’s college tuition.

Safe investment vehicles are particularly important in uncertain economic times and periods of recession when other investment vehicles tend to decline in value. Demand for U.S. Treasuries tends to grow when there is an economic crisis. However, as government bonds are deemed so safe, they tend to offer lower yields than higher risk investments.

Why are U.S. Treasuries Attractive to Investors?

Income derived from treasury securities is not taxed at the state or local level, although it is taxed at the federal level. Another attractive feature for the individual investor is the fact that Treasuries can be bought in denominations as low as $100. In addition, the buying process is fairly convenient. Bonds are sold at auction by the government at a fixed face value and interest rate. They can also be purchased through banks and brokerage firms, or directly via the TreasuryDirect website. The interest rate on a bond is referred to as a ‘coupon rate’. The date when the money is paid out is referred to as ‘maturity’ dates.

What are the Risks attached to U.S. Treasuries?

There are two main risks attached to purchasing U.S. Treasuries. These are:

Inflation Risk: This refers to the risk that your purchasing power could fall as inflation increases. If the value of the dollar falls while your money is invested in a U.S. Treasury Bond or other instrument, you will as a result lose money. If inflation is 2% a year, you will lose two dollars out of every hundred dollars every year.

Currency Risk: This refers to the risk that the dollar could lose its value against other currencies. Consequently, this could have an impact on your savings if you intend to buy products manufactured or produced overseas.

Buying and Selling on the Secondary Market

Following an auction, a bond can be resold on the secondary market for a higher price than was paid for at auction. This is known therefore as “selling at a premium”.

References for Who Buys U.S. Treasuries – Rusty Tweed team:

http://cashmoneylife.com/us-treasury-bonds/

http://www.finra.org/investors/us-treasury-securities

http://useconomy.about.com/od/economicindicators/p/Treasuries.htm

http://www.bargaineering.com/articles/treasury-bonds-securities-basics-explained.html

Spotlight on U.S. Treasuries

7.26.16 | By Rusty Tweed team

What are U.S. Treasuries?

U.S. Treasury securities (also known as U.S. Treasuries) are debt obligations that the U.S. government holds. They take the form of bills, notes and bonds. If you purchase a U.S. Treasury security, you effectively lend money to the federal government for a pre-determined amount of time.

U.S. Treasuries are generally thought to be the safest of all investments. The market perceives them to have almost no credit risk i.e. your interest and principal will almost certainly be paid in full and on time.  As they are backed by the “full faith and credit” of the government, they are trusted because the government can raise tax revenues and print currency if necessary.

As a result of the safety of the investment, interest rates are generally lower on U.S. Treasuries than for other riskier debt securities like corporate bonds that are more widely traded.

U.S. Treasuries by Rusty Tweed team

What is the Relationship Between U.S. Treasuries and the Federal Reserve?

The Fed creates “Federal Reserves” i.e. electronic money that it uses to purchase loans held by financial institutions such as banks, therefore injecting those reserves into the economy. The loans which the Fed holds are traditionally U.S. Treasuries. Therefore, as PBS economist, Paul Solman, explains, “the Treasury is the borrower and the Fed, the lender, however indirectly.”

During the 2008-2009 financial crisis, according to Federal Reserve Bank reporter, Paul J. Santoro, “the Treasury altered its cash management practices to facilitate the Fed’s dramatic expansion of credit to banks, primary dealers, and foreign central banks.”

Santoro elaborates, “Understanding the relationship between Federal Reserve credit policy and Treasury cash management is important because the relationship illuminates an important but sometimes unappreciated interface between the Treasury and the Fed. It also underscores the symbiotic relationship between the two institutions, in which each assists the other in fulfilling its statutory responsibilities.”

Why Doesn’t the Federal Reserve Purchase Treasury Securities Directly from the U.S. Treasury?

The Federal Reserve Act indicates that the Federal Reserve may buy and sell Treasury securities solely in the “open market”. This supports the independence of the central bank in conducting economic policy. Moreover, the Federal Reserve conducts its purchases and sales of securities primarily through transactions with primary dealers – a group of major financial firms that have a long established trading relationship with the Federal Reserve Bank of New York (FRBNY). Private market demand sets the prices on new Treasury Securities. However, the majority of the Treasury securities that the Federal Reserve has purchased are “old” securities that the Treasury issued some time ago.

References for U.S. Treasuries by Rusty Tweed team:

http://www.investinginbonds.com/learnmore.asp?catid=9&subcatid=50&id=97

http://www.sec.gov/answers/treasuries.htm

https://www.publicdebt.treas.gov/fsprograms/fs_tss.htm

http://www.bankrate.com/rates/interest-rates/treasury.aspx

http://www.finra.org/investors/us-treasury-securities

http://www.pbs.org/newshour/rundown/does-the-fed-feed-the-treasury-whats-their-relationship-really-like/

http://www.federalreserve.gov/faqs/money_12851.htm