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How Treasury Coupons Are Set and On-the-Run Issues Work

Article Quant Q&A · Author: Alex
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Summary

The note explains how government bond coupons relate to issuance prices and market yields. Coupons are generally chosen so a new bond is issued near par, matching the preferences of investors who want its coupon yield to be close to prevailing rates. Zero-coupon securities are another structure, and short-term Treasury bills use discount issuance rather than periodic coupons because of their brief maturities.

It also clarifies that a quoted 10-year Treasury coupon refers to the latest 10-year issue, called the on-the-run security, excluding reopenings of older bonds. Coupons differ across maturities because required yields vary along the yield curve; the note gives the example of longer-term debt requiring more yield than shorter-term debt. The explanation is conceptual and does not cover auction mechanics in detail, how coupon rates are selected numerically, or how a particular bond's coupon differs from its changing market yield after issuance.

Key ideas

  • Treasury coupons are generally set to support issuance near par under prevailing market conditions.
  • Zero-coupon debt avoids periodic payments, while short-term bills are issued at a discount.
  • A quoted benchmark coupon typically belongs to the latest issue of that maturity, excluding reopenings.
  • Coupon rates can differ by maturity because required yields vary along the yield curve.

Tags

Fixed incomeUS markets
Full text
# Question regarding coupons for government bonds


# Question regarding coupons for government bonds












I was looking at government bonds/treasuries and I wondered if my line of thinking is correct:

1) In general, how is the coupon set? I found out that usually they are auctioned for (a bit) less than par value, which makes me think a coupon based on the market is set by the treasury and then it fetches a price according to market demands. Is this correct?

2) On bloomberg.com, you can view the 10y Treasury coupon. Now I was wondering: Is the coupon simply the coupon of the latest auction? If so, it it the same for long- and short-term debt (bills, notes, bonds)?

## Answer by Lliane (score 3, accepted)

https://quant.stackexchange.com/a/42883

1) Yes, the coupon is usually set so that the bond would be issued at par because that's what mainstream investors usually prefer (current yield close to interest rates). There are also issues of zero coupon which eliminate reinvestment risk and are preferred by other types of investors (insurers for instance). In the US, you can strip the coupons from the principal and thus get 0 coupons equivalents as well.

Short term bills are issued at a discount with 0 coupon because there's no reason bothering with coupons for a couple of months, it's just easier to price 0 coupons.

2) That's the coupon of what is called "on-the-run treasury", which is the latest 10Y issued (excluding retaps of older issues). 5Y coupon and 30Y coupon will be different because the yield curve is not flat (investors required additional yield for 30Y).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.