Treasury bill of the United States Government - Term Paper Example

Introduction: The aim of the paper is to study the T-bill or the Treasury bill of the United s Government in detail. The paper will and substantiate the various aspects of a Treasury bill. It will in specific relevance provide information on the history of the Treasury bill, trading on the Treasury bill, statistics pertaining to the asset in terms of its yield and all important data over the recent years, the current scenario of the Treasury bill in the United States and in the end ensure a comprehensive report on the asset. What is a T- bill? A Treasury bill known as a T-bill is a type of security that is issued by the United States Treasury through the Bureau of Public debt. The Treasury bill finances the government by borrowing money from citizens. Investors can purchase T- bills when they become available or when the government decides to issue them. They mature after a set period of time usually less than a year, and the investors redeem their T- bills for the face value. The purchase of a T- bill serves as a temporary loan to the United States Government which returns it when the T-bill matures. Who can purchase a T- bill? A Treasury bill can be purchased by citizens, banks, financial institutions and corporate houses. While private investors do purchase T- bills, banks and financial institutions are capable of purchasing them on a much larger scale, and thus make up bulk of the trade on the initial day of the T- bill offering. Why buy a T- bill? The smallest face value of a T-bill is $1000 making it a very attractive purchase. The T- bill is sold at a discount, which is determined by the Bureau of public debt. But the treasury pays the full face value when it is redeemed. For example an investor may purchase a 90- day treasury bill for $900 and expect a return of $100 at the time of maturity. This $100 is the return on the investment that the investor receives. The treasury has issued a $1000 T-bill at $900. The T-bill does not bear interest by is highly predictable and very stable, barring complete financial collapse of the United States Treasury. Investors may choose to include the T- bill in their profiles as they are highly stable investments with a pre-set time of maturity and decent dependable return. Unlike more risky investments the T- bill is unlikely to return a substantial sum, but when they are traded in large volume they can represent a substantial return. Investors can potentially purchase millions of dollars worth of Treasury bills assuming they possess the available capital. They are also extremely liquid assets, making them a versatile and useful addition to a diverse investment portfolio. Once a Treasury bill is purchased they can be traded or sold in the secondary market before it matures and is ready to be redeemed. Many individuals purchase the T- bill from banks and financial institutions that have purchased them from the Treasury. The Treasury bill is fast to mature creating a rapid turnover investment when compared to a Treasury that takes a time of 2- 10 years, or Treasury bonds that take 10 – 30 years. What does the treasury achieve through the exchange of Treasury bills? The answer to this question is quoted in the book ‘The Federal Reserve System’ which goes on to explain that ‘Treasury bills play an important role in the conduct of monetary policy. When the trading desk at the Federal Reserve Bank of New York undertakes open market operations, it does so by buying and selling Treasury bills in the secondary market. For instance when the Federal Reserve buys bills from dealers it injects reserves into the banking system. When bills are sold, the Federal Reserve is trying to accomplish just the opposite: to remove reserves from the banking system. The buying and selling of Treasury bills allows the Federal Reserve to change the amount of reserves in the banking system and, concurrently, the level of federal funds rate. Whether the Federal Reserve influences reserves and rates through outright purchases of bills in the market or through repurchase agreements- the sale or purchase of bills today with an agreement to reverse the transaction in a few days the Treasury bill market is an important element in the implementation of monetary policy.” (Hafer 2005) Thus the above quoted text clarifies to us the role of the Treasury bill in the monetary policy of the United States. It states the dual advantage of the Treasury bill both in terms of providing security for the investment and the larger role it plays in moderating the interest rate and regulating the reserve ratio. History of the T- bill…… The history of the Treasury bill dates back to 1929 in the United States. In order to tackle the unforeseen financial demand that occurred during and after World War 1, US treasury issued bills, notes and bonds. After World war 2 along with the popularity of other short term government demand and acceptance for treasury bills also seemed to rise due to its short term maturity period, no pre- determined interest rate and are easier to issue and less expensive for the Treasury. (Maps of world finance 2005) Modalities of a Treasury bill. Treasury bills are short term marketable securities issued at a discount rather than at par. The price of this is determined through competitive bidding, and the purchase is done primarily through auctions. However, at the secondary level the bills can be bought and sold from traders. The bills are bought and sold on a weekly basis with a maturity period of within 1 year are issued with maturities of the following periods. 1. 4 weeks or 28 days ( 1 month) 2. 13 weeks or 91 days ( 3 months) 3. 26 weeks or 182 days ( 6 months) The 13 week and 26 week bills are auctioned every Monday and results are declared the next day, from which we get to know: *Discount Yield or Discount Rate: the annualized rate of return based on Par value and calculated on a 360 day basis. *Investment Yield or Equivalent Yield: the annualized rate of return based on the Purchase Price calculated on a 365 day basis. *Current Price of Treasury Bills. (Maps of world finance 2005) Trading on the US Treasury bill is like trading with any other security there is no paper proof that the investor will receive as the bills are maintained online. The debt distribution of the US Treasury among the various securities and assets as of April 2008 is mentioned in table and Pie chart below: Security Percentage Bills 10.94 Notes 27.09 Bonds 6.1 TIPS 5.23 Federal Financing Banks 0.15 Domestic Series 0.32 Foreign Series 0.05 REA Series 0 State and Local Government series 3.06 US Saving Securities 2.08 Government account series 44.93 Other 0.05 Source: This matter.com Source: This matter.com From the above pie chart it is evident that the Treasury bill of the United States holds a significant part of the nation’s debt capital. The current Scenario on the US Treasury Bill…. An article in the Associated press online explains clearly the current scenario on the US Treasury bill. It reads as follows: “Interest rates on six-month Treasury bills have fallen to the lowest level this year, but economists are more worried about recent rise in long-term rates because it could threaten a rebound in the housing market. The Treasury Department on Monday auctioned $30 billion in six-month bills at a discount rate of 0.290 percent, down from 0.345 percent last week. Another $31 billion in three-month bills was auctioned at a discount rate of 0.160 percent, down from 0.190 percent last week. The six-month rate was the lowest since they sold for 0.250 percent on Dec. 29, 2008. The three-month rate was the lowest since the bills sold for 0.150 percent on June 1. Rates on the three- and six-month bills have been moving in a narrow band below 1 percent for many months. Analysts expect they will stay at low levels until the economy shows greater signs of recovering and the Federal Reserve starts raising interest rates to guard against inflation. The Fed in December cut its target for the federal funds rate, a key short-term rate which influences three- and six-month Treasury rates, to a record low of between 0.25 percent and zero. Fed officials will meet again on June 23-24, and economists believe they will maintain a low funds rate to provide more support for a recovery expected in the second half of this year. The funds rate directly influences banks prime lending rate, the benchmark for millions of short-term business and consumer loans such as home equity lines of credit. The prime rate has been at 3.25 percent since December, the lowest level in more than a half-century. Longer-term interest rates have been rising in recent weeks, reflecting a variety of factors such as signs the economy is stabilizing and worries about the amount of debt the federal government is having to sell to finance a budget deficit projected to hit a record $1.84 trillion this year. Sung Won Sohn, an economist at California State University, Channel Islands, said that the increases in long-term rates could present a problem for the economy if they begin to depress demand for home mortgages. The 10-year Treasury note, a key benchmark for home mortgage rates, is now trading around 3.7 percent, up about 1.7 percentage points from its lows of December. Rates on 30-year mortgages jumped to the highest level in seven months last week, rising to 5.59 percent, from 5.29 percent the previous week, according to a survey by mortgage giant Freddie Mac. That increase has depressed mortgage activity including what had been a big boom in re financings. The discount rates on three-month and six-month Treasury bills reflect that the bills sell for less than face value. For a $10,000 bill, the three-month price was $9,995.96, while a six-month bill sold for $9,985.34. That would equal an annualized rate of 0.162 percent for the three-month bills, and 0.294 percent for the six-month bills. Separately, the Federal Reserve said Monday that the average yield for one-year Treasury bills, a popular index for making changes in adjustable rate mortgages, rose to 0.56 percent last week from 0.50 percent the previous week.”(Crutsinger 2009) Conclusion: Below are the treasury bills rates on a daily basis from the beginning of June 2009 as displayed on the official US Treasury website. The rates are depicted based on the days of maturity. 4 WEEKS 13 WEEKS 26 WEEKS 52 WEEKS   DATE BANK COUPON BANK COUPON BANK COUPON BANK COUPON DISCOUNT EQUIVALENT DISCOUNT EQUIVALENT DISCOUNT EQUIVALENT DISCOUNT EQUIVALENT 6/1/2009 0.13 0.13 0.13 0.13 0.29 0.29 0.44 0.45 6/2/2009 0.06 0.06 0.14 0.14 0.27 0.27 0.45 0.46 6/3/2009 0.08 0.08 0.14 0.14 0.26 0.26 0.44 0.45 6/4/2009 0.08 0.08 0.14 0.14 0.27 0.27 0.46 0.47 6/5/2009 0.07 0.07 0.19 0.19 0.34 0.35 0.61 0.62 6/8/2009 0.07 0.07 0.19 0.19 0.35 0.36 0.6 0.61 6/9/2009 0.09 0.09 0.19 0.19 0.31 0.31 0.54 0.55 6/10/2009 0.11 0.11 0.18 0.18 0.31 0.31 0.53 0.54 6/11/2009 0.09 0.09 0.19 0.19 0.3 0.3 0.51 0.52 6/12/2009 0.07 0.07 0.18 0.18 0.28 0.28 0.5 0.51 6/15/2009 0.07 0.07 0.17 0.17 0.29 0.29 0.48 0.49 6/16/2009 0.09 0.09 0.17 0.17 0.3 0.3 0.48 0.49       Source : US Treasury online. The table stands evidence to the above article that was published in associated content online. The heavy discounting of the bills shows the Treasury’s intention to boost purchase and increase money supply in order to raise Federal Reserve to aid government spending. References: Crutsinger Martin, ‘Rates on 6- month Treasury bill hit low for a year’ 16 June 2009. The Associated Press. 17 June 2009. http://www.google.com/hostednews/ap/article/ALeqM5jWe-rhheoPn0hsiRfGSucBxdFiTwD98RBQK82 ‘Daily treasury bill rates’ ‘Interest rate statistics’ 16 June 2009. ‘US Department of Treasury.’ 17 June 2009. http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/daily_treas_bill_rates.shtml Hafer . W Rik. ‘The Federal Reserve system’ New York. Greenwood publishing house, 2005 ‘History of Treasury bill’ Maps of World Finance 2009. Maps of World. 17 June 2009 http://finance.mapsofworld.com/treasury/treasury-bill-history.html S. E Smith, ‘What is a T- bill’ Wise Geek. 2003. Conjecture Corporation. Wise Geek 17 June 2009. http://www.wisegeek.com/what-is-a-t-bill.htm Spaulding C William 2008. ‘US Treasury securities’ This matter. 17 June 2009. http://thismatter.com/money/bonds/types/government/treasury-securities.htm . Read More