How Does the U.S. Borrow Money?

History

The issuance of debt by the United States government is allowed under Article I, Section 8 of the U.S. Constitution, which empowers Congress to borrow funds on the credit of the nation. Congress has delegated this authority to the Department of the Treasury, which issues debt through the Bureau of Public Debt. National debt was first issued to finance the American Revolutionary War.

Treasury bills, also known as T-bills, are the shortest term U.S. government debt obligations. These securities have maturity dates of 28, 91, 182 or 364 days. Treasury bills do not pay interest. Instead, they are sold at auction for a discount from the par value of the security. The par value of the security is the value paid by the U.S. Treasury at maturity. The difference between the auction price of the security and the par value constitutes the profits to the investor.

Treasury notes, or T-notes, are medium-term governmental debt obligations. T-notes have maturities of between one and 10 years. Treasury notes pay interest in semi-annual payments known as coupons. Like Treasury bills, Treasury notes are sold at auction. The Department of the Treasury attempts to set the interest yield so that the auction price of the notes approximates the par value.

Treasury bonds, or T-bonds, are the U.S. debt obligations with the longest maturities, between 20 and 30 years. Treasury bonds, like Treasury notes, pay interest in semi-annual coupons. Like other Treasury debt obligations, they are sold at auction. Because of their longer maturities, Treasury bonds help the U.S. government avoid the short-term repricing risk that occurs when debt obligations mature and payments must be funded through the issuance of additional debt. Interest rates on Treasury bonds are typically higher than interest rates on Treasury bills or notes.

Although the issuance of Treasury debt obligations constitutes the majority of U.S. public debt, additional debt is issued by intra-governmental and quasi-governmental U.S. agencies that are not included in total public debt totals.

By law, Congress establishes a maximum debt ceiling, controlling the size of the public debt. In practice, Congress routinely votes to expand this debt ceiling at request of the Treasury.