Section 3.6 – U.S. Government and Agency Securities

  • 🇺🇸 U.S. Government Securities Overview

    • The U.S. Treasury issues debt to fund federal projects.

    • Only debt issued directly by the U.S. government is backed by the full faith and credit of the U.S.

    • The U.S. Treasury Department determines how much debt to issue and what types (bills, notes, or bonds).

    • The federal government is the nation’s largest borrower.

    • “Full faith and credit” is based on the government’s taxing power.

    • Treasury securities are considered the safest and most liquid investments in the world.

    • Settlement: T+1 (one business day).

💵 Types of Treasury Securities

Type / Maturity / Interest / Key Points

  • Treasury Bills (T-Bills) / Short-term (4, 8, 13, 26, 52 weeks)  / No periodic interest; issued at discount, mature at par / Only Treasury securities issued at a discount; highly liquid; considered the risk-free benchmark (13-week used for risk-free rate).

  • Treasury Notes (T-Notes) / 2–10 years / Pay semiannual interest / Issued at par; principal and final interest paid at maturity.

  • Treasury Bonds (T-Bonds) / 10–30 years / Pay semiannual interest / Issued at par; long-term; safe but sensitive to interest rate changes.

💡 Remember:

  • T-bills = short-term, no coupon.

  • T-notes = medium-term, semiannual interest.

  • T-bonds = long-term, semiannual interest.

🧾 Treasury Receipts and STRIPS

  • Treasury Receipts:

    • Created by broker-dealers (not the Treasury).

    • Broker-dealers buy T-notes/T-bonds, deposit them in a bank, and separate interest and principal payments into individual securities (“stripping”).

    • Not backed by full faith and credit—backed only by the BD that created them.

  • Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities):

    • Created by banks and dealers, but backed by the U.S. government.

    • Each component (interest and principal) becomes a zero-coupon bond.

    • Both Receipts and STRIPS are zero-coupon investments (sold at discount, pay at maturity).

📈 Treasury Inflation-Protected Securities (TIPS)

  • Maturities: 5, 10, and 20 years.

  • Fixed coupon rate, but principal adjusts every 6 months based on inflation (CPI).

  • Interest payments rise during inflation and fall during deflation.

  • Principal repayment at maturity will never be less than original par ($1,000), even if deflation occurs.

  • Protects investors from purchasing power risk.

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🏦 Federal Agency and Government-Sponsored Enterprise (GSE) Securities

  • Authorized by Congress to issue debt to support public policy objectives.

Agency / Type / Backed by / Purpose

  • Farm Credit System (FCS) / GSE / Not full faith & credit; backed by its own securities / Provides agricultural loans through banks; overseen by Farm Credit Administration (FCA).

  • Government National Mortgage Association (GNMA / Ginnie Mae) / Government-owned ✅ / Full faith and credit / Supports HUD; issues mortgage-backed securities (MBS); pays monthly (principal + interest); subject to prepayment risk.

  • Federal Home Loan Mortgage Corporation (FHLMC / Freddie Mac) / GSE / Backed by Freddie Mac’s own credit / Buys residential mortgages and packages them into MBS; semiannual payments of principal + interest.

  • Federal National Mortgage Association (FNMA / Fannie Mae) / GSE / Backed by Fannie Mae’s own credit / Buys mortgages from banks and federal agencies (FHA, VA) and issues MBS; semiannual payments.

  • Student Loan Marketing Association (SLMA / Sallie Mae) / GSE / Own credit Issues debt to fund student loans.

💡 Note:

  • GNMA (Ginnie Mae) = only agency backed by full faith and credit.

FNMA & FHLMC = corporate-owned GSEs; their stocks trade on the secondary market.
Chapter 4

✺ Review questions ✺

  • The U.S. Treasury Department.

  • Bills, Notes, and Bonds.

  • Treasury Bills (T-bills).

  • 2 to 10 years.

  • Semiannually (every six months).

  • Zero-coupon securities created by broker-dealers, not backed by the U.S. government.

  • STRIPS are backed by full faith and credit of the U.S. government.

  • Inflation (purchasing power risk).

  • GNMA (Ginnie Mae) only.

  • Monthly payments that include both interest and principal.

  • The Farm Credit Administration (FCA).

  • Government-Sponsored Enterprises (GSEs) — investor-owned corporations that trade on the secondary market.