What are Treasuries?
Treasuries are debt securities issued by the U.S. government through a system of periodic auctions. Issued by the U.S. Treasury, these securities are considered one of the safest fixed-income investments, as they’re backed by the full faith and credit of the U.S. government.
Treasuries can be of two types: marketable or non-marketable. Marketable Treasuries are very liquid and heavily traded in the secondary market. Non-marketable Treasuries, like savings bonds, are issued to investors and can’t be transacted on the secondary market.
There are five types of marketable treasury securities.
- Treasury bills (T-bills, with maturity of less than one year)
- Treasury notes (T-notes, with maturity ranging from two to ten years)
- Treasury bonds (T-bonds, with maturity of 20 and 30 years)
- Treasury inflation-protected securities (TIPS, are currently issued for five-, ten- and 30-year maturities)
- Floating rate notes, the most recent Treasury issue, which commenced in January 2014 (FRNs with a term-to-maturity of two years)
The prices and consequent yields of marketable Treasury securities are decided by competitive bids at public auctions held by the Treasury.
What are investment-grade loans?
Investment-grade loans are syndicated loans that are bought or traded by a group of banks or institutional investors. The loans are structured, arranged, and administered by investment and commercial banks (the arrangers) and then syndicated to other banks or institutional investors. Firms with a high ability to repay and service loans are considered investment-grade and receive an investment-grade credit rating—that is, BBB- or above.
With a maturity that can range between several months to more than ten years, investment-grade loans are priced at or below the London Interbank Offered Rate, LIBOR, plus 150 basis points (or 1.5%). Investment-grade loans are a very small part of the bank loan market, as higher-rated corporates typically have more options to raise capital. Investment-grade loans are often undrawn revolvers that backstop commercial paper programs for blue-chip companies and are held by banks most of the time.
In this series, we’ll discuss the important distinctions between Treasury securities and investment-grade loans. To find out more, read on to Part 2.