Flow of Funds Overview: Treasury Securities and Commercial Paper

Treasury Securities and Open Market Paper

Investment grade money market securities

These two types of securities are grouped together because they are generally considered to be low risk, either because of the government guarantee, the dollar denomination, or because of the short-term.

Overview: Flow of funds: Treasury Securities and Commercial Paper

The main purpose of Treasury securities and open market paper is to provide income and safety of principal for short-term applications of cash.

Treasury Securities

Treasury securities are obligations of the United States government.

They are often considered to be risk-free, but the U.S. government does, from time to time, change the terms and conditions of Treasury securities, without consent of the holders.

Prior to 1933, Treasury securities were backed by gold. Citizens could convert proceeds on redemption into gold, but this promise was revoked by the New Deal.

The government also frequently changes the tax on interest paid on Treasury securities, thereby essentially changing the net amount paid to investors.

In the case of inflation-indexed securities, the government determines the rate of inflation and taxes investors on the inflated principal.

The federal government, through the Federal Reserve Bank, tries to manipulate interest rates by intervening in the market for treasuries and open market paper.

Treasuries and Open Market PaperThe federal government manipulates market prices for treasuries and open market paper.

Treasury securities are purchased mainly by broker-dealers, foreign investors, money market mutual funds, households, and the Federal Reserve Bank (the Monetary Authority).

Open Market Paper

Open-market paper consists of short-term promissory notes and bankers acceptances sold mainly by issuers of asset-backed securities, banks, and corporations.

The main purchasers are money market mutual funds, funding corporations, and state and local governments.


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