The Capital Markets

CHAPTER 10U.S. Treasury and Government Agency Securities

Lee Griffin and David Isaac

FEATURES OF U.S. TREASURY SECURITIES

U.S. Treasury securities are direct obligations of the U.S. government, backed by its full faith and credit. Proceeds from the sale of these securities are used to finance the activities of the federal government and to refund its outstanding debt. Since Treasuries are generally considered to be free of credit risk, they serve as a “safe haven” credit during times of economic or geopolitical tumult and are widely held by investors around the world. Given the perception of Treasuries' lack of credit risk and their ubiquity they serve as the benchmark security for the global fixed‐income markets.

In addition to credit quality, the most important feature Treasuries offer is liquidity. Liquidity is measured by the ease with which a financial asset can be converted to cash without a substantial change in its price. There is a large and active secondary market for U.S. Treasuries, supported by primary dealers and institutional investors around the world. (A primary dealer is a large bank or securities dealer recognized by the Federal Reserve Bank as a market maker in U.S. Treasuries. Primary dealers are required to bid for a portion of every Treasury auction.) Unlike many fixed‐income products, it is possible to obtain bid and offered quotes at any time on virtually any U.S. Treasury security.

For U.S. taxpayers, one last selling point is that interest on U.S. ...