Treasury marketable securities

What Is Treasury Marketable Securities?

Treasury marketable securities are debt instruments issued by the U.S. Department of the Treasury to finance the federal government's operations. These securities are considered among the safest fixed-income securities globally because they are backed by the full faith and credit of the U.S. government. Unlike non-marketable securities, such as U.S. savings bonds, marketable Treasuries can be readily bought and sold in the secondary market before their maturity date. This characteristic makes them highly liquid and a cornerstone of the global bond market. The U.S. Treasury issues several types of marketable securities, including Treasury Bills, Notes, Bonds, and Treasury Inflation-Protected Securities (TIPS)⁸.

History and Origin

The U.S. government has historically issued debt to fund its expenditures, particularly during times of war or economic expansion. Early forms of U.S. government debt predate the Treasury Department itself. The modern system of issuing Treasury marketable securities, especially through competitive bidding, evolved over centuries. The shift towards a more formalized and accessible system for individual investors began to take shape with the creation of TreasuryDirect. TreasuryDirect originated in 1986 as a computerized book-entry system that allowed investors to hold securities without physical certificates, a significant move to increase efficiency and reduce costs⁷. In October 2002, the TreasuryDirect website was launched, further modernizing the process by enabling individual investors to directly purchase and manage these securities online, including marketable bills, notes, and bonds⁶.

Key Takeaways

Treasury marketable securities are government debt instruments that can be bought and sold in the secondary market.
They are backed by the full faith and credit of the U.S. government, making them low-risk investments.
Types include Treasury Bills (short-term), Notes (intermediate-term), Bonds (long-term), and TIPS (inflation-indexed).
Investors can purchase them directly through TreasuryDirect or via banks, brokers, and dealers.
These securities play a crucial role in managing the U.S. national federal debt and influencing interest rates.

Formula and Calculation

The pricing and yield of Treasury marketable securities depend on their type.

For Treasury Bills (T-Bills): T-Bills are zero-coupon bonds sold at a discount rate to their par value and mature at par. The yield is calculated as:

\text{Discount Yield} = \frac{\text{Face Value} - \text{Purchase Price}}{\text{Face Value}} \times \frac{360}{\text{Days to Maturity}}

For Treasury Notes and Bonds: These pay a fixed coupon rate every six months. Their price is determined by the present value of future coupon payments and the final par value. While a direct formula for price can be complex, the yield to maturity (YTM) is often calculated iteratively or using financial calculators. The basic concept is that the price of a bond is the sum of the present value of its future cash flows (coupon payments and par value at maturity).

\text{Price} = \sum_{t=1}^{n} \frac{\text{Coupon Payment}_t}{(1 + \text{YTM})^t} + \frac{\text{Face Value}}{(1 + \text{YTM})^n}

Where:

(\text{Coupon Payment}_t) = Periodic coupon payment at time (t)
(\text{Face Value}) = Par value of the bond
(\text{YTM}) = Yield to maturity
(n) = Number of periods until maturity

Interpreting Treasury Marketable Securities

Interpreting Treasury marketable securities involves understanding their role as indicators of market expectations and risk. The yield curve, which plots the yields of Treasuries with different maturities, is a widely watched economic indicator. An upward-sloping yield curve, where longer-term Treasuries have higher yields than shorter-term ones, typically signals expectations of economic growth and rising inflation. Conversely, an inverted yield curve, where short-term yields are higher than long-term yields, can signal impending economic slowdowns or recessions.

For individual investors, the yield on Treasury marketable securities represents the "risk-free rate" of return, a benchmark against which other investments are measured. Their prices move inversely to interest rates; when interest rates rise, the value of existing Treasury marketable securities with lower fixed coupon rates tends to fall on the secondary market, and vice versa. This makes them sensitive to changes in central bank monetary policy.

Hypothetical Example

Suppose an investor, Sarah, is looking for a low-risk investment for a portion of her investment portfolio. She decides to purchase a 10-year Treasury Note with a par value of $1,000 and a 3% coupon rate.

Purchase: Sarah buys the Treasury Note at auction for its par value of $1,000.
Coupon Payments: Since it's a 3% coupon rate paid semi-annually, Sarah receives $1,000 * (3%/2) = $15 every six months. Over 10 years, she will receive 20 such payments.
Maturity: After 10 years, on the [maturity date](https://diversification.com/term/maturity date), the U.S. Treasury repays Sarah the $1,000 par value.

If Sarah holds the note until maturity, her total return will be all the coupon payments plus the repayment of the principal. If, however, interest rates rise after she buys the note, its market price might fall below $1,000 if she wanted to sell it before maturity, as new notes would offer a higher yield. Conversely, if interest rates fall, the note's price would likely increase, allowing her to realize a capital gains if sold before maturity.

Practical Applications

Treasury marketable securities serve multiple critical functions in financial markets and for various entities:

Government Finance: They are the primary means by which the U.S. government borrows money to cover budget deficits and manage the national debt.
Monetary Policy: The Federal Reserve uses Treasury marketable securities in its open market operations to influence the money supply and short-term interest rates. By buying Treasuries, the Fed injects money into the banking system, increasing liquidity; by selling them, it withdraws money. This is a core tool for implementing monetary policy.⁵
Safe-Haven Investments: During periods of economic uncertainty or market volatility, investors often flock to Treasury marketable securities due to their perceived safety, driving up prices and pushing down yields.
Benchmarking: The yields on Treasuries serve as a benchmark for pricing other debt instruments, such as corporate bonds, mortgages, and consumer loans. The spread above Treasury yields indicates the additional risk premium for other assets.
Collateral: These securities are widely used as collateral in repurchase agreements (repos) and other financial transactions, underpinning liquidity in short-term funding markets.

Limitations and Criticisms

While highly regarded for their safety, Treasury marketable securities are not without limitations or potential criticisms:

Inflation Risk: Fixed-rate Treasury Notes and Bonds are susceptible to inflation risk. If inflation rises unexpectedly, the purchasing power of future fixed coupon payments and the principal repayment decreases, eroding the real return on investment. Treasury Inflation-Protected Securities (TIPS) mitigate this by adjusting their principal based on inflation.
Interest Rate Risk: The value of existing Treasury marketable securities can decline if prevailing interest rates rise, leading to potential capital losses for investors who sell before maturity.
Low Yields: In periods of low interest rates, the yields offered by Treasury marketable securities may be insufficient to meet an investor's income needs or keep pace with inflation, especially for short-term bills.
Debt Ceiling Concerns: While a U.S. government default is historically unprecedented due to its ability to print its own currency, political impasses over the debt ceiling can create market uncertainty and briefly affect Treasury yields. Such events have prompted warnings from the Congressional Budget Office (CBO) about potential disruptions to financial markets and the U.S. economy if the debt limit is not addressed, although a default has always been averted³, ⁴.

Treasury Marketable Securities vs. Treasury Bills

The distinction between "Treasury marketable securities" and "Treasury bills" is one of scope. Treasury marketable securities is the overarching category for U.S. government debt that can be traded in the secondary market. This category includes four main types: Treasury Bills, Treasury Notes, Treasury Bonds, and Treasury Inflation-Protected Securities (TIPS)².

Treasury Bills (T-Bills) are a type of Treasury marketable security characterized by their short maturities, typically ranging from a few days to 52 weeks. They are sold at a discount to their face value and do not pay periodic interest. When they mature, the investor receives the full face value. In contrast, Treasury Notes and Bonds have longer maturities (2-30 years) and pay fixed interest payments (coupons) every six months. The term "Treasury marketable securities" encompasses all these different instruments that are actively traded, providing liquidity and price discovery in the market.

FAQs

Q: Are Treasury marketable securities risk-free?
A: They are considered to be virtually free of default risk because they are backed by the full faith and credit of the U.S. government, which has the power to tax and print money. However, they are still subject to interest rate risk and, for fixed-rate instruments, inflation risk.

Q: How can I buy Treasury marketable securities?
A: Individual investors can buy them directly from the U.S. Treasury through the TreasuryDirect website, which offers a secure online platform. Alternatively, they can be purchased through banks, brokers, or dealers.¹

Q: What is the difference between marketable and non-marketable Treasury securities?
A: Marketable Treasury securities can be bought and sold on the secondary market before their maturity, meaning their price fluctuates based on market conditions. Non-marketable securities, like U.S. savings bonds, cannot be traded in the secondary market and must be held until maturity or redeemed early with the Treasury.