Government Security

A government security is a bond issued by a government with a promise of repayment at maturity. Government securities can also pay periodic coupon or interest payments. These securities are considered low-risk investments since they're backed by the government.

Government securities are debt instruments that a government sells to investors to raise money to finance projects or the government's day-to-day operations. Much like a corporation issues debt in the form of bonds to raise capital for buying equipment or funding the company's expansion, so too do governments issue debt to raise funds. By issuing debt, governments can avoid hiking taxes or cutting other areas of spending in the budget each time they need to raise capital needed for a project.

Once the debt or bonds have been issued, the bonds are either held by investors until maturity or sold to other investors in the secondary bond market. Investors buy and sell previously issued bonds in the market for a variety of reasons including to earn interest income from the bond's periodic coupon payments or to allocate a portion of their portfolio into risk-free assets.

How Government Securities are Issued

The U.S. Treasury Department issues government securities through auctions to institutional investors for buying and selling. Retail investors can purchase government securities directly from the Treasury Department’s website, banks, or brokers. Since most government securities are backed by the full faith and credit of the U.S. government, a default is unlikely.

Government Securities and the Federal Reserve Bank

Rates on government bonds affect the U.S. economy. The government’s sale or repurchase of its bonds affect the money supply and influence interest rates. For example, when the Federal Reserve repurchases Treasuries from investors, the investors deposit the funds in their bank or spend the money in the economy. The spending stimulates retail sales and economic growth. The depositing of funds into bank accounts allows banks to use those deposits to increase lending to individuals and companies. The increase in lending boosts economic activity as the money is spent in various ways. Therefore, the repurchasing of Treasuries by the Fed increases the money supply in the economy and stimulates economic activity.

The repurchase of Treasuries also pushes bond prices higher since the Fed's actions shrink the supply of Treasuries in the market. As a bond prices rise, bond yields fall driving interest rates in the overall economy lower. New issues of government bonds are also issued at lower yields in the market further driving down interest rates. As a result, The Fed can significantly impact the trajectory of interest rates and bond yields for many years.

Savings bonds offer a fixed interest rate over a certain period of time. When investors buy and hold savings bonds until maturity, they receive the bond’s face value plus accrued interest. Savings bonds are not redeemable for the first 12 months that they are outstanding. Redeeming a bond in the first five years means forfeiting the last three months of interest.

T-Bills

T-Bills or treasury bills are short-term securities that can have maturities of just a few days up to a maximum of 52 weeks. However, typical maturities are 4, 8, 13, 26, and 52 weeks. The longer the maturity date, the higher the interest rate that the T-Bill will pay to the investor. For example, as of March 29th, 2019 the 4-week T-bill yield was 2.39% while the one-year T-bill yielded 2.32%.

Treasury Notes

Treasury notes (T-notes) are intermediate-term bonds maturing in two, three, five, or 10 years. They provide semiannual interest payments at fixed coupon rates. T-Notes typically have a $1,000 face value; those with two- or three-year maturities have a $5,000 face value.

Although yields changes daily, the 10-year yield closed at 2.406% on March 31, 2019, and at that time had a 52-week range of 2.341% to 3.263%. In the 52-week range, we can see yields had fallen over time. Weeks earlier, the Fed had signaled they would hold off hiking interest rates, which sent yields lower as investors rushed to buy existing Treasuries.

Treasury Bonds

Treasury bonds (T-Bonds) are long-term bonds maturing between 10 to 30 years. T-Bonds provide semiannual interest payments and have $1,000 face values. The bonds fund shortfalls in the federal budget, regulate the nation’s money supply, and execute U.S. monetary policy. The 30-year Treasury bond yield closed at 2.817% on March 31, 2019.