Executive Summary

Abstract

This study provides an overview of federal debt – its history, its composition, its management, its economic uses, and a discussion of recent trends. The Continental Congress began issuing debt securities in 1776, and the United States has had outstanding debt ever since. The first Secretary of the Treasury Alexander Hamilton established sound goals and principles for debt management that transformed U.S. government debt from highly speculative and illiquid securities into the world’s safest and most liquid investment. Because of Hamilton’s visionary leadership, Treasuries developed a unique set of characteristics – default risk-free, a seamless yield curve, high liquidity, a deeply integrated market, and extremely low bid-ask spreads – that let Treasuries perform many economic functions other than financing past federal budget deficits. For example, the Federal Reserve uses Treasuries to conduct U.S. monetary policy. Foreign central banks hold Treasuries as a store of value and a means to intervene in foreign exchange markets. Treasuries are the premier “safe haven ” investment during economic turbulence. Wall Street uses the Treasury yield curve as the default risk-free pricing benchmark, while Washington indexes its loans to students and farmers to Treasury yields. Treasuries collateralize approximately four-fifths of the transactions in the $2.5 trillion a day repurchase agreement (repo) market. Portfolio managers employ Treasuries for interest rate hedging or speculation and for improving risk-return trade-off in their portfolios. As a regulatory tool, the Pension Benefit Guaranty Corporation (PBGC) utilizes the 30-year Treasury bond yield to determine the funding adequacy of private defined-benefit pension plans, the payout amount if an employee leaves an employe