What Are The Characteristics of US Government Treasury Securities

Government Securities

The world's largest bond markets are the markets for government securities. Government securities comprise well over half the bonds outstanding at any one time. A government bond is defined as a bond issued by a sovereign national government and denominated in the currency of that government. These bonds are usually considered to have no default risk.

The largest and most important government bond market is the market for U.S. Treasury bonds.  The U.S. Treasury has over $6 trillion dollars of marketable bonds, notes and bills outstanding at any one time and is the largest issuer of debt in the world.

The liquidity and volume of trade in these issues is exceptional.  Also, because U.S. Treasuries are perceived to have no risk of default, they determine the baseline yield for all dollar denominated bonds and notes worldwide.

The U.S. Treasury issues three types of instruments: bills, notes, and bonds. Treasury bills are short term money market instruments with maturities of a year or less, while notes and bonds are longer term, coupon bonds.

The charts here show who owns US Treasury securities and how much they own.

All Treasury notes and bonds share the characteristics shown below. In the past, the Treasury issued bonds which were callable at par five years prior to maturity. While it no longer does so, some of these bonds are still outstanding. 

Interest, Pricing and Settlement

Treasury bonds and notes are issued with semi-annual coupons. The first coupon is usually paid six months after the issue date but this is not always so. If a bond is issued less than six months before the first coupon, it is said to have a short coupon. If it is issued more than six months before, it is said to have a long coupon. Whether a bond has a long or short coupon, coupon payments after the first are always separated by the standard six month period.

U.S. Treasury bond and note trades normally settle one business day after trade date.

If a trade is executed on Tuesday February 4th, it will settle on Wednesday February 5th. If a trade is executed on Friday February 7th the trade is settled on Monday February 10th.

A useful rule of thumb for calculating profit or loss on a rate change is that for each $1 million in par value, a price change of 1/32nd is equal to $312.50. Let’s see how this works.

A trader buys $3,000,000 in Treasury bonds at 105-31 and sells them later that day at 106-17. The trader makes $16,875 (18 x $312.50 x 3 = $16,875)

On Thursday, March 24, a trader purchases the following bond at 101-27.

$2,000,000 U.S. Treasury bond

8% coupon payable March 15 and September 15

(The actual number of days between March 15 and September 15 is 184.)

To find out the total amount of money that should be paid we first of all convert the price of 101.27/32nds to decimals = 1.0184375.

Clean price = 10184375 x $2,000,000 = $2,036,875

Accrued interest = $4,348 (.08/2 x 2,000,000 x 10 days coupon/184)

Total paid = $2,041,223

Regulation

U.S. Treasury securities are exempt from SEC registration requirements.  Instead, the U.S. Treasury issues rules and generally oversees the market, while the Federal Reserve regulates the activities of the primary dealers.  The Government Securities Act of 1992 requires all government securities dealers to register with the SEC and establishes price disclosure and reporting requirements.

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Comments 2 comments

billyaustindillon profile image

billyaustindillon 6 years ago

Very timely I was jsut reading about the rumor that Zhou has fled China for losing 400 billion or so on US Treasuries- don't how you do when you are long and that was the perfect asset class to be in. The currency risk maybe but sounds a little far fetched to me.


one2get2no profile image

one2get2no 6 years ago from Olney Author

I agree with you. They would had to have $3.5 trillion in bonds and a drop of 2% in yield to suffer a dollar loss alone. Maybe you are on the button with currency risk but still sounds like a political losing face before the elections story.

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