Treasury securities, also called Treasuries, are debt instruments issued by the U.S. Department of Treasury and backed by the full faith and credit of the U.S. government.
U.S. Government securities are attractive to investors because they are free of default risk, benefit from state and local tax exemption, and are among the most liquid of financial instruments. Before the development of the European bond market due to the creation of the EMU, the U.S. market was the largest in the word in terms of volume, followed by the Japanese, Italian, German and French markets. In the U.S.A., market participants can rapidly execute large-volume transactions for government debt, and the spread between ask and bid price is low if compared with other sectors of the bond market. These conditions ensure one of the highest degrees of liquidity in the Treasury securities markets worldwide. There are two categories of Treasury securities: coupon securities and discount securities. The first type pays interest every six months, plus principal at maturity. Discount securities pay a contractually fixed amount at maturity (face value or maturity value). The positive spread between the face value and the issue value represents the corresponding returns. The categories of Treasury Securities available are Treasury Bills, Treasury Notes, Treasury Bonds and Treasury Inflation-Protected Securities (TIPS). Even if the Treasury does not issue zero-coupon bonds, these are purchased by investment and banking firms that are allowed to create their own receipt using the process of coupon stripping. These receipts are generally referred to as Stripped US Treasury Zero Bonds. The auctions for Treasury securities are run by the US Federal Reserve of New York and the Bureau of Public Debt (BPD) in Washington D.C. and they are based on the competitive bidding method. Typically, a high volume of Treasury securities is purchased at auction by "primary dealers" through the submission of competitive bids. However, competitive bidding is limited to 35% of the issue amount for each bidder, to ensure a sufficient level of competition in the secondary market. Non-competitive tenders are also admitted. Generally, non-competitive tenders are submitted by small investors and individuals, because in this way they are guaranteed to receive the full amount of the security bid and not to pay any commission fees to a dealer. However, non-competitive bidders must accept the discount rate determined at auction and cannot purchase more than a face amount of $5 million. The highest bids on a yield basis are allocated their requests in full followed by the remaining bids until the fixed amount of bonds is completely allocated. The highest bids are offered at the lowest price, known as the stop yield. If an investor submits a bid that is higher in yield than the stop yield, it is said to be "shut out" because he/she does not obtain any of the new issue, while the winners are awarded at the highest yield accepted (no winner’s curse). Since November 1998 this method, generally referred to as single price-auction or "Dutch auction", has substituted the multiple price-auction for all auctions run by the U.S. Treasury. The auction frequency and the maturity of issues are decided by the U.S Department of Treasury. Until the 1970s, Treasury auctions regarded exclusively the sale of the shortest-term government security, Treasury bills. Eventually, the auction process gradually encompassed notes and bonds. Currently, there are Treasury bills auctions in three-month and six-month maturities, and Treasury notes auction notes in two-year, five-year and ten-year maturities.
The auction officially starts with the diffusion of the Treasury public announcement by most major newspapers, the financial press, and television stations. Once an auction is announced, the bidding begins. Bids are kept sealed until the auction date and may be submitted through a broker, dealer, or other financial institution, or electronically with an established account through the Treasury Automated Auction Processing System (TAAPS) and through Treasury Direct ( or Legacy Treasury Direct. Finally, the auction is closed and the results (stop yield, price, quantity of security awarded and allocated to non-competitive tenders, median yield bid and the bid-to-cover ratio) are communicated by the Treasury and the issuance of the new securities begins. The secondary market for treasuries is an over- the- counter (OTC) market where primary dealers conclude transactions with the general investing public and other institutions. In general, for Treasuries, settlements occur on the business day after the transaction day ("next day" settlement). Treasuries can be also traded in the secondary market prior to the Treasury issue date (wi-market). In general, dealer firms make use of repurchase agreements (repo) to finance their inventories or to cover their short positions. Repo market is usually preferred to bank financing because it allows cost savings.

FABOZZI F., MODIGLIANI F. and JONES F. (2010), Foundation of Financial Markets and Institutions, Pearson International Edition.

Editor: Bianca GIANNINI

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