What Are Treasuries?


There are different types of U.S. Treasury Securities. A quick reference can be found here: http://www.treasurydirect.gov/indiv
/products/products.htm
and is reproduced below:

Treasury Bills
Treasury bills are short-term government securities with maturities ranging from a few days to 52 weeks. Bills are sold at a discount from their face value.

Treasury Notes
Treasury notes are government securities that are issued with maturities of 2, 3, 5, 7, and 10 years and pay interest every six months.

Treasury Bonds
Treasury bonds pay interest every six months and mature in 30 years.

Treasury Inflation-Protected Securities (TIPS)
TIPS are marketable securities whose principal is adjusted by changes in the Consumer Price Index. TIPS pay interest every six months and are issued with maturities of 5, 10, and 20 years.

I Savings Bonds
I Savings Bonds are a low-risk savings product that earn interest while protecting you from inflation. Sold at face value. Check out our table that is a comparison of TIPS and Series I Savings Bonds.

EE/E Savings Bonds
EE/E Savings Bonds are a secure savings product that pay interest based on current market rates for up to 30 years. Electronic EE Savings Bonds are sold at face value in TreasuryDirect. Paper EE Savings Bonds are sold at 1/2 face value.

So, we are back in the game of trying to understand the herd. But does the general public really influence bond pricing that directly? Certainly individual contributions to 401Ks, IRAs, mutual funds, college funds, and stocks play a large role in setting share prices for equities. But does the average investor really have any influence on bond pricing? We all feel capable of expressing an opinion on the prospects for Wal-Mart, Apple, or General Motors, but do we think we understand the dynamics of changing inflation rates? Probably not, and as such, when individuals invest in bonds, they usually do so through bond fund managers and rarely change their allocations. So who DOES influence bond pricing? Well for one, the bond issuer. The U.S. Treasury Department periodically holds auctions for new bonds. The prices for those bonds are determined and institutions line up to bid and buy. One of the largest holders of Treasuries is the U.S. Federal Reserve. So in effect, the U.S. government prints money, borrows money, and holds debt on that borrowed money, with itself, through different departments. While it may seem strange, it allows the Fed to influence pricing of bonds, which in turn influences pricing on bank lending, real estate pricing, and all sorts of financial mechanisms.


During the current financial crisis, the Fed diversified its balance sheet. While it previously held most of its assets in Treasuries, it recently had only a third there with another third in mortgages and the final in other types of debt. So who else holds large amounts of Treasuries? China. As the Chinese economy has grown at a double digit pace, and the trade imbalance between the U.S. and China increased, China accumulated a massive amount of U.S. currency and Treasuries.


Let's back up a moment. Forecasts of pricing are needed to estimate the risks of investing. All forecasts are estimates based upon models using historical data and assumptions about relationships. A review of the relationships between CRE pricing shows that the largest influence on pricing is the cap rate. Cap rates move more or less with other fixed income investment yields given investors are commonly seeking the greatest return at the lowest risk. The 10-year U.S. Treasury is an excellent index against which other fixed income investments are compared. The spread between cap rates and the 10-year Treasury moves with liquidity of real estate and availability of capital. Since both fluctuate considerably, the raw link between Treasuries and cap rates is poor, as shown in the graphs below:

 

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