Purpose of Debt Issuance

Why does the Federal Government Issue Debt?
The United States Treasury primarily issues debt to cover shortfalls in revenue for the federal budget. The Congressional Budget Office’s latest information, for the year 2015 breaks down the federal budget:

$3.7 trillion in spending

$3.2 trillion in revenue

Indicating a $500 billion deficit.

Treasury issues securities to cover this gap in funding.

Treasury Auctions
The U.S. Treasury issues debt through an auction process. Treasury announces an offering to the public. Potential investors can place bids in one of two fashions:

1.Non-competitive – agree to buy at yield determined by auction

2. Competitive – investors place an order for a number of securities, and maximum yield they are willing to pay.

Full Faith and Credit
Securities offered by the Treasury are backed by the “full faith and credit” of the U.S. government. Essentially, the United States government guarantees that obligations will be repaid, and on time.

There has only been one moment – in 1979 – when payments were delayed due to an unusually large volume of small investors, delayed debt ceiling legislation, and a software problem involving word processing.

Types of Securities Offered at Auction
Bills – short-term, maturity from a few days to 52 weeks; sold at discount

Notes – 2, 3, 5, 7, 10 year maturities; pay interest every 6 months

Bonds – 30 year maturity rate; pay interest every 6 months

EE and E Savings Bonds – up to 30 years; pay interest based on market rates

Treasury Inflation Protected Securities (TIPS) – 5, 10, 30 year maturities; inflation protected, based on the Consumer Price Index (price of marketable goods), payoff is the larger of the original or adjusted principal.

Floating Rate Notes – 2 year maturities; variable interest rates determined by discount rate of 13 week Treasury bills.

Treasury Securities on the Secondary Market
Treasury securities are popular investment options because the United States dollar is seen as a strong and safe currency. Investors are willing to risk lower interest rates in order to secure guaranteed obligations of payment.

Treasuries are also a very liquid form of securities, making them excellent candidates for trade on the open market. Treasury securities will vary in value based on current interest rates. Generally, if current interest rates are higher than a security issue’s the price of that issue will decline on the secondary market.

The secondary market operates as an over-the-counter market, where dealers offer bid and ask prices on securities that are outstanding. ,

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