G-Secs

G-secs are debt instruments or investment products offered by the government of a nation to let investors buy them so that the government can raise funds for necessary operations. It consists of a range of investment products to the investors by government or government-funded entities.

The U.S. Department of Treasury issues U.S. government securities. They exemplify the safest form of investment since the U.S. government backs them. It primarily comes with an assurance of the repayment of the full amount of initial principal invested at maturity. The three types of government securities are Treasury bills, bonds, and notes.

• G-secs are securities issued by the government to raise capital to meet spending requirements.
• The three main types of U.S. government securities are Treasury bills, bonds, and notes issued by the U.S. Department of Treasury.
• These securities come with low risk and return. But with the assurance of repayment of the principal amount at the time of maturity.

Government securities are investment products issued by the government's treasury department to raise capital that they further use in important projects, necessities, and ongoing operations. The government receives revenue by imposing taxes on the income and other activities made by the citizens, which are further used to take care of healthcare services, infrastructure, schemes, education, etc. But when they become short of funds to cover the project's expense or urgent capital requirement, they issue Treasury bonds, notes, or bills to raise capital.

Government securities offer a steady income to their buyers. They are considered the safest investment in the U.S. Although the G-secs interest rate is low, it also shares the minimum risk factor for its investors. The principal amount invested is highly secured and is repaid to the investor at the time of maturity. If an investor wants to sell, the U.S. government securities are highly liquid and can be easily sold with the help of a broker or a bank. The government securities investment ranges from six months to thirty years term.

There are mainly three types of G-secs in the U.S.:

Treasury Bills

The treasury department of the U.S. auctions T-bills. These bills are short-term debt instruments with one year or less maturity period. T-bills are usually zero-coupon bonds. The government issues T-bills usually for financing public projects like constructing roads, hospitals, community centers, schools, etc. The maturity period varies from 4 to 52 weeks. The old bills are available on the secondary market, but the new and freshly issued T-bills are sold in the auction through a bidding process.

Treasury Bonds

Such bonds come with a maturity period of twenty or more and deliver periodic interest income to investors until maturity. The interest income flows every six months, and after reaching maturity, the face value of the bond is paid to the investor. People interested in buying can apply online in the monthly auctions held by the U.S. Department of Treasury. These bonds are also traded in the secondary market. Many investors buy such bonds to plan their retirements.

Treasury Notes

Treasury notes are the third type of G-secs, and just like bonds, the interest is paid semiannually every six months. However, the time of maturity varies between two to ten years, and due to the secondary market activities, they are considered highly liquid. Apart from the maturity period, Treasury notes are similar to T-bonds.

Example 1

Kate has earned a good amount of money by working for two years; now, she wants to invest the funds but does not know the financial markets. So, she studies different types of investments and comes across government bonds. Kate reads that the government bonds are safe and provide a steady income stream since Kate wants to invest for the long term and does not want to put her money at risk. So, she decides to purchase U.S. Treasury bonds.

Kate using TreasuryDirect, bought a 20-year Treasury bond. Kate adores the idea of government bonds, though it offers a low rate of return but also have low risk and provide Kate with a consistent income flow and assurance that at the time of maturity, she will receive the full principal amount invested by her. At the same time, if she wishes to sell these G-secs, she can do it through a broker or a bank.

Example 2

Treasury Inflation Protected Instruments (TIPS) are fixed income securities in the form of bonds that provide inflation protection and are released by the U.S. government. TIPS favors investors by reducing the effects of unanticipated high inflation and maintains investments' purchasing power. Like other government bonds, the principle will be refunded when the instrument reaches maturity, as well as regular interest payments on the par value of the instruments.

Each year, the U.S. Treasury adjusts the par value of TIPS based on the Consumer Price Index (CPI), a measure of inflation. Even if the interest rate stays the same, in response to inflation, altering par value and related modifications in interest payment safeguard investors from experiencing a loss in purchasing power. With CPI inflation, interest payments are essentially adjusted based on the adjusted par value. At the same time, deflation will lower the par value of TIPS.

This has been a Guide to G-secs. We explain the meaning, types, examples of government securities, and features like price, interest rate & yield. You can learn more from the following articles -

• Fed Balance Sheet
• Accommodative Monetary Policy
• Debt Fund