The Treasury Securities Market: Overview and Recent Developments
Dupont, Dominique, Sack, Brian, Archambeault, Emilie, Federal Reserve Bulletin
Dominique Dupont and Brian Sack, of the Board's Division of Monetary Affairs, prepared this article. Emilie Archambeault provided research assistance.
The market for U.S. Treasury securities is by many measures the largest, most active debt market in the world. At the end of September 1999, the amount of Treasury debt held outside federal government accounts totaled about $3.6 trillion, close to the amount of outstanding debt securities issued by all U.S. corporations combined.(1) Moreover, enormous amounts of Treasury securities are traded every business day. Over the first nine months of 1999, the primary dealers in government securities, which are among the most active participants in the market, together executed an average of $190 billion worth of transactions in the securities each day.(2)
The heavy trading is an indication of the pivotal role of U.S. Treasury securities in world financial markets. Investors of many types--commercial banks, investment banks, money market funds, insurance companies, individual investors, and foreign central banks, among others--use the Treasury market for investing and hedging purposes. Yields on the securities are widely viewed as benchmarks in the pricing of other debt securities and are analyzed for the information they might reveal about market participants' expectations about the future path of the economy and monetary policy.'
This article begins with a description of the structure of the Treasury market, including the process by which securities are issued in the primary market and the mechanics of the secondary market. The determinants of investor demand for Treasury securities are then discussed in some detail. The article concludes with a discussion of several recent developments and emergent trends that have affected the market, including the advent of inflation-indexed securities, a reduction in the issuance of Treasury securities, and shifts toward electronic trading and alternative clearing arrangements.
OVERVIEW OF THE MARKET
The market for U.S. Treasury securities has a complex structure and involves numerous participants-the Department of the Treasury, the Federal Reserve System, government securities dealers and brokers, and other holders of Treasury securities.
Scope of the Market
The federal government finances its expenditures in excess of tax receipts through the sale of debt obligations. Over the years, the Congress has delegated to the Department of the Treasury its authority under the Constitution to issue debt securities. The United States, initially as the Continental Congress, first incurred debt in 1776 when it borrowed funds to finance the Revolutionary War.(3) Total Treasury debt remained fairly small in the first half of the nineteenth century but rose sharply with the Civil War and again with World War I (chart 1). After declining slightly, the debt increased nearly threefold during the Great Depression and exploded in the 1940s as the government financed expenditures related to World War II. From its postwar low in 1949, outstanding Treasury debt grew gradually for nearly two decades before accelerating at the time of the Vietnam War and during the subsequent period of high inflation. In the 1980s, the growth of the stock of debt picked up further, spurred by the tax cuts and rapid increases in defense spending of the decade.
[Chart 1 ILLUSTRATION OMITTED]
In recent years, budget surpluses have halted the upward climb in the total amount of Treasury debt held outside government accounts. However, the overall magnitude of outstanding debt remains substantial, a legacy of past budget deficits. At the end of September 1999, the total par value of outstanding Treasury debt, including that held in government accounts, stood at about $5.6 trillion, or about 61 percent of the total annual output of the economy. This fraction, though considerable, is well below the peak after World War II (chart 2). …