The Treasury Securities Market: Overview and Recent Developments

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.