US Treasury Bills, Notes and Bonds

U.S. Treasury bills, notes, and bonds, together known as “Treasuries”, are issued by the Treasury Department and represent direct obligations of the U.S. government. Treasuries are backed by the full faith and credit of the U.S. government, and have very little credit risk.

They issued in various maturities of up to 10 years.

Characteristics

Treasury Bills

• Negotiable, noninterest-bearing securities with original maturities of three months, six months, and one year.
• Offered in minimum denominations of $10,000, with multiples of $5,000 thereafter, and are offered only in book entry form.
• Issued at a discount from face value and are redeemed at par value.
• The difference between the discounted purchase price and the face value is the interest income for the purchaser.
• The yield is a function of interest income and maturity of the T-bill.

Treasury Notes and Bonds

• Issued in maturities of 2, 3, 5, and 10 years on a regular schedule.
• Treasury notes are not callable.
• Pay interest semiannually, when coupon rates are set at the time of issuance based on market interest rates and demand for the issue.
• Issued monthly or quarterly, depending on the maturity of the issue.
• Settle regular-way, which is one day after the trade date (T+1).
• Interest is calculated using actual/365-day-count convention.

Treasuries are used for all investment, hedging, and speculative purposes.

Issuing Practices

T-bills are issued at regular intervals on a yield auction basis. The three-month and six-month T-bills are auctioned every Monday. The one-year T-bills are auctioned in the third week of every month. The amount of T-bills to be auctioned is released on the preceding Tuesday, with settlement occurring on the Thursday following the auction. The auction of T-bills is done on a competitive-bid basis (the lowest yield bids are chosen because they will cost the Treasury less money). Noncompetitive bids may also be placed on purchases of up to $1 million.

The price paid by these bids (if allocated a portion of the issue) is an average of the price resulting from the competitive bids. Two-year and 5-year notes are issued once a month. The notes are generally announced near the middle of each month and auctioned one week later. They are usually issued on the last day of each month. Auctions for 3-year and 10-year notes are usually announced on the first Wednesday of February, May, August, and November. The notes are generally auctioned during the second week of those months and issued on the 15th day of the month.

Primary Market

Treasury notes and bonds are issued through yield auctions of new issues for cash. Bids are separated into competitive bids and noncompetitive bids. Competitive bids are made by primary government dealers, while noncompetitive bids are made by individual investors and small institutions. Competitive bidders bid yields to three decimal places for specific quantities of the new issue. Two types of auctions are currently used to sell securities:

Multiple-price auction. Competitive bids are ranked by the yield bid, from lowest to highest. The lowest price (highest yield) needed to place the allotted securities auction is determined. Treasuries are then allocated to noncompetitive bidders at the average yield for the accepted competitive bids. After all Treasuries are allocated to noncompetitive bidders, the remaining securities are allocated to competitive bidders, with the bidder bidding the highest price (lowest yield) being awarded first. This procedure continues until the entire allocation of securities remaining to be sold is filled. Regional dealers who are not primary government dealers often get their allotment of Treasury notes and bonds through primary dealers, who may submit bids for the accounts of their customers as well as for their own accounts. This type of auction is used for 3-year and 10-year notes.

Single-price auction. In this type of auction, each successful competitive bidder and each noncompetitive bidder is awarded securities at the price equivalent to the highest accepted rate or yield. This type of auction is used for 2-year and 5-year notes. During the one- to two-week period between the time a new Treasury note or bond issue is auctioned and the time the securities sold are actually issued, securities that have been auctioned but not yet issued trade actively on a when-issued basis. They also trade when-issued during the announcement to the auction period.

Secondary Market

Secondary trading in Treasuries occurs in the over-the-counter (OTC) market. In the secondary market, the most recently auctioned Treasury issue is considered ‘‘current,’’ or ‘‘on-the-run.’’ Issues auctioned before current issues are typically referred to as ‘‘off-the-run’’ securities. In general, current issues are much more actively traded and have much more liquidity than off-the-run securities. This often results in off-the-run securities trading at a higher yield than similar-maturity current issues.

Reference: Federal Reserve Board