What are Treasury bonds?

A bond is simply a loan- a promise to pay back borrowed money at a specified future date, with interest rate payment(s) as compensation to the lender. Since 1776, the United States has needed a means of raising funds to pay for its government's operation. While taxes and tariffs have been able to fund a portion of these expenses, America has issued various debt instruments throughout her history. This debt has been in the form of bonds, bills, and notes, issued by the U.S. Treasury Department. Colloquially, they are known as Treasury bonds, Treasury securities, or simply Treasuries.  

 

In addition to these marketable securities, the U.S. Treasury issued several types of non-marketable debt instruments. They have included Adjusted Service Bonds, (issued to veterans of WWI), Armed Forces Leave Bonds, (servicemen of WWII), and Postal Savings Bonds, the forefather of the U.S. Savings Bond.  Most notably the Treasury issues non-marketable debt via the U.S. Savings Bond program, which began in 1935 under FDR.

What is the national debt?

The national debt of the United States is the accumulated amount of money America owes to all of its creditors.  These creditors are bondholders: ranging from individual American citizens to large banks, investment funds, foreign individuals, corporations, and governments. The United States even owes itself. The U.S. Government has on its balance sheet a line item for intragovernmental holdings: debt issued against money borrowed from various federal trust funds used to fund current government expenditures. The U.S. national debt stands currently at over $22 trillion dollars, with about $6 trillion of that being intragovernmental holdings.

What is the deficit?

The deficit is the annual difference between what the Federal Government takes in, (revenues from taxes, fees, etc.), and what the government must spend (outlays). As the U.S. has not had a history of balancing its receipts and expenditures, deficits have continued to grow the U.S. national debt. As a fiscal year ends, the total amount of debt grows by the deficit or shortfall in the nation's budget. The national debt could be reduced were the U.S. to have a surplus in revenues in any particular year.  In 1835, under President Andrew Jackson, the United States paid off entirely the national debt, which at the time was about $58 million. This is the only time in history the Unites States retired its entire national debt, and it lasted all of one year.

How is the debt issued today?

The U.S. Treasury Department is authorized by Congress to borrow money for operating the federal government.  Marketable treasury securities are issued and sold through regular auctions.  Participants submit competitive and noncompetitive bids on various debt securities.  These bonds are then traded via secondary markets with buyers and sellers all over the world. One of the biggest markets involving Treasury securities is the Treasury Futures and Options markets at the Chicago Mercantile Exchange (CME). Other types of debt, such as U.S. Savings Bonds, can be purchased directly from The Treasury Department. Savings bonds are not considered a marketable Treasury security; they are not transferable (with escheat exceptions), nor are they traded in any secondary markets.  

Why are U.S. Treasury securities so important?

U.S. Treasury Bonds are the most important financial instrument in the world, save the U.S. dollar itself.  There are many reasons for this fact.  On a yearly basis, trillions of dollars in Treasuries are auctioned off and traded throughout the global financial marketplace.  Whether it is a short-term need to park money or a long term investment of reserve funds, individuals, small companies, large multinational corporations, and foreign governments rely on the availability and liquidity of U.S. Treasury securities.  Treasuries represent the most reliable investment throughout the world, and thus a bedrock foundation for the global financial system. The promise of the United States to fulfill its financial commitments is considered sacrosanct within the markets, despite whatever political theater may play out in Washington D.C. at any particular time.

 

Many nations in the past have of course defaulted on their sovereign obligations, causing financial turmoil both within their borders and in the global financial system.  But it is the stability of the major sovereign debt markets, (countries such as Germany, France, the U.K., Japan, Switzerland), lead by the United States that allows the global banking system to function.

 

 

Has the U.S. Government ever defaulted on its bonds?

If one were to ask most financial advisors, bond traders, or government officials, the likely answer would be no- U.S. Treasuries have always paid.  And while this is technically true, there was an occurrence in American history whereby the Treasury defaulted on the stated original terms of a bond issue. The Fourth Liberty Loan, issued in 1918, was to be payable, "in United States gold coin of the present standard of value." However, because of House Joint Resolution 192, the federal government had suspended payment in gold in 1933, a year before the Fourth Liberty Loan was called.  Despite a legal challenge to this default on the gold exchange provision, (wherein the Supreme Court acknowledged that the 14th Amendment had been violated), the Fourth Liberty Loan was not redeemed at the terms of its original issuance.  The high court felt that to pay bondholders at the 1918 gold value would be an unjust enrichment, so the ruling had only a symbolic meaning for the bondholders.

Are paper U.S. Treasury Bonds rare?

Generally speaking, paper Treasury Bonds are rare.  America's debt is no longer issued in certificated form, as bonds are now issued as book-entry securities kept by electronic record keeping. The U.S. Government has been issuing various forms of debt for well over two hundred years. For the majority of our history, that debt was in the form of registered and bearer securities. Registered bonds denote the individual owner and have a record of ownership, while bearer bonds have no such record. Hundreds of billions of dollars was issued and retired in this manner. So in terms of their original purpose, paper debt certificates never started off as something difficult to obtain. As the U.S. financial system grew in size and complexity, paper bonds became more and more onerous to manage.  So by the early 1980's, a decision had been made to phase out paper in favor of electronic book-entry securities.

 

In terms of our national debt, less than 0.0007% remains outstanding as bearer and registered securities. This translates into about $127 million worth of unredeemed (marketable) bonds. One should note that U.S. Savings Bonds are not part of that outstanding total. As of May 2016, there are no longer any outstanding bearer or registered bonds earning interest.  These remaining bonds are matured securities that have not been redeemed. This does not mean that collectors and investors are sitting on that entire amount. Most of the $127 million is gone, forever lost to history.  Time has a way of destroying paper- natural disasters, made-man catastrophes, forgotten ownership, etc., etc.  A registered bond might have been able to be replaced, but bearer instruments were particularly susceptible to unrecoverable loss, as there was no centralized record of ownership. The age of paper debt securities is over.  The examples of U.S. Treasuries currently known are but a small fraction of the outstanding unredeemed debt.  

Do people collect old bonds?

The hobby devoted to collecting old stock and bond certificates is known as scripophily.  Scripophily is a small part of the larger hobby of numismatics. Within the hobby, collectors of old bonds have mostly focused on securities that were proofs (non-issued sample printings), remainders (non-issued bonds), or issued securities that became obsolete due to a default of the borrower.  There are bonds from railroads, bankrupt corporations, old cities, foreign governments, and even the short-lived Confederacy.  Once the paper became worthless, it was usually discarded or filed away after some time. Some investors did choose to save their defaulted bonds, often under a false assumption that the security may have some value in the future.

 

Since U.S. Treasuries have never defaulted, there would be no logical incentive for an individual to ever hold a bond past its redemption date, since the security would no longer continue to earn interest.  Early Savings Bonds (known as war or defense bonds) are fairly common in the collector marketplace, and are easy enough to obtain to begin a nice collection. As for collecting U.S. Treasuries? This becomes a more challenging task.  For unlike stamps, coins, and paper currency, not many people thought to buy marketable Treasury Bonds to save as a memento for posterity.  In this respect, these certificates are truly ephemera... paper meant only to last for a short-lived purpose.

Copyright The Joe I. Herbstman Memorial Collection of American Finance ™   All rights reserved.