US Government Securities

Government securities and money market instruments are major components of the US financial system. They are the most widely owned types of securities among individual and institutional investors, and carry the lowest levels of investment risk. US Government securities, which consist of bills, notes and bonds are a significant source of financing for the US treasury. Various government agencies also issue debt securities, making credit available to such important segments of the economy as agriculture and housing.

The US money market includes short term government and agency obligations as well as various other debt instruments with maturities of less than one year. Billions of dollars in transactions take place in the money market each business day. It is a wholesale market for low risk, highly liquid short-term securities. While these securities are traded in large denominations, generally $100,000 or more, small investors participate indirectly in money market funds.

The US government raises money through debt offerings in order to meet expenses and finance the budget deficit. It issues both marketable and nonmarketable securities with maturities ranging from three months to 35 years. Once issued, after market trading of US government securities is handled by brokers and dealers in the over the counter market.

Government securities are backed by the full faith and credit of the federal governement. Because the government has unlimited taxing power, it can always raise taxes to finance it's debts. The US government has never defaulted on it's securities. Government securities (also known as treasury securities), are considered virtually risk-free, with the highest possible credit ratings. They are also highly liquid investments with an active secondary market for all types of issues.

While their interest is lower than corporate fixed income securities, the interest on government securities is exempt from state and local taxes. It is, however, fully taxable at the federal level. Capital gains on government securities are subject to all applicable taxes.

Marketable US government securities are traded in the primary market between the Federal Reserve System and several firms designated as primary dealers. These are large commercial banks and securities dealers which maintain a high level of activity in the government securities market. These dealers trade securities with each other, as well as with the public. Their transaction are generally made with very large accounts, such as banks, corporations and insurance companies.

Many other commercial banks and securities firms not designated as primary dealers handle government securities transactions in the secondary market.