How the U.S. Treasury Securities Market Works

The U.S. Treasury finances the operations of the United States government by collecting revenue such as tax but also by borrowing by issuing short term bills, notes and bonds. These various types of securities. are backed by the full faith and credit of the United States government. The US Treasury market is the largest and most liquid government bond market in the world. It is where the US government raises funds to finance its operations and debt obligations, and it acts as a benchmark for interest rates globally.

The Treasury has a current pattern of financing for marketable U. S. Treasury bills, notes, bonds, FRNs and TIPS. These are auctioned to primary dealers who bid on them at set times each week and month.

U.S. Treasury Building

The timing can be affected by Treasury borrowing requirements, financing policy decisions, and the timing of Congressional action on the debt limit could alter or delay the pattern. We will look at each treasury marketable security and their general auction timing. These are important to understand as the affect not just interest rates and treasury prices, but other debt instruments, stocks, currencies and housing prices potentially.

“Marketable” means that you can transfer the security to someone else and you can sell the security before it matures (reaches the end of its term).

You can also buy non-marketable U.S. savings bonds from the United States Treasury. They are not marketable because each is registered to one person’s social security number. You cannot sell them or transfer them to someone else.

US Treasuries Trade in Two Markets

Treasuries have two marketplaces, a primary market and the secondary market.

In the primary market, new Treasury securities become issued through auctions conducted by the US Treasury. These are the auctions that occur on a regular schedule, and they allow the US government to raise funds by selling new securities to investors. The auction process involves setting a coupon rate, or the interest rate that the government will pay to bondholders, and then accepting bids from investors at various price levels.

In the secondary market, Treasury securities already issued can become bought and sold by investors. The secondary market is a critical component of the Treasury market because it allows investors to adjust their holdings of Treasury securities as their investment needs change. The secondary market is highly liquid, allowing investors to easily buy and sell Treasury securities at market prices.

Source: US Treasury

From The TradersCommunity Research Desk