The federal government borrows money by selling Treasury securities to investors, banks, and other countries

When the federal government spends more money than it collects in taxes, it borrows the difference by issuing Treasury securities—essentially IOUs that promise to pay back the money with interest. The U.S. Treasury Department runs this borrowing operation. Investors, banks, pension funds, and foreign governments buy these securities because they are backed by the full faith and credit of the United States, making them among the safest investments available.

The process is straightforward: the Treasury announces how much it needs to borrow, sets the interest rate, and holds an auction. Buyers bid on the securities, and the Treasury sells them to the highest bidders. The money raised goes into the Treasury's account, and the government uses it to pay bills—salaries for federal employees, Social Security checks, military spending, and everything else Congress has authorized.

Key Takeaways

  • The Treasury sells three main types of securities: Treasury bills (under one year), Treasury notes (two to ten years), and Treasury bonds (20 to 30 years), each with different interest rates and maturity dates.
  • Foreign governments and central banks own roughly one-third of all U.S. Treasury securities, with China and Japan historically among the largest holders.
  • The interest rate the Treasury pays depends on how long the loan lasts and what investors demand at the time of the auction—longer loans cost more in interest.
  • When the government borrows, it must eventually repay the principal plus interest, which means future tax revenue or future borrowing goes toward debt service instead of new programs.

The three types of Treasury securities and how they work

The Treasury issues three main categories of securities, each designed for different investors and time horizons. Treasury bills mature in less than one year—typically 4 weeks, 8 weeks, 13 weeks, or 26 weeks. They are sold at a discount, meaning you pay less than the face value upfront and receive the full amount at maturity. For example, you might pay $9,800 for a $10,000 bill, and the $200 difference is your interest.

Treasury notes mature in 2, 3, 5, 7, or 10 years and pay interest every six months. You buy them at face value (usually $100 minimum) and receive regular payments plus the full amount back at maturity. Treasury bonds work the same way but mature in 20 or 30 years, meaning the government borrows the money for decades. Because you are lending money for longer with bonds, the interest rate is typically higher than for bills or notes—investors demand more compensation for tying up their money for 30 years.

The Treasury holds auctions regularly: bills are auctioned weekly, notes and bonds are auctioned monthly. Anyone can bid, though most purchases are made by large institutions. You can buy Treasury securities directly through TreasuryDirect.gov without paying a broker fee, or through a bank or brokerage firm.

Who buys Treasury securities and why

Treasury securities appeal to a wide range of buyers because they are backed by the U.S. government and carry virtually no risk of default. Foreign central banks and governments are major holders—as of recent years, China, Japan, the United Kingdom, and Canada hold substantial amounts. These countries buy Treasuries partly as investments and partly because holding U.S. dollars and dollar-denominated assets is useful for international trade and currency management.

Domestic buyers include banks, insurance companies, pension funds, and individual investors. Banks hold Treasuries as safe assets they can quickly convert to cash if needed. Pension funds buy longer-term bonds to match their long-term obligations to retirees. Individual investors buy them for retirement accounts or as a conservative holding when stock markets are volatile. The Federal Reserve, the central bank of the United States, also buys and sells Treasuries as part of managing the money supply and interest rates.

The appeal is straightforward: Treasuries are liquid (straightforward to sell), safe, and offer a may provide return. In times of economic uncertainty, demand for Treasuries rises because investors flee riskier investments. This increased demand can actually lower the interest rate the Treasury must pay, because investors are willing to accept smaller returns for safety.

How interest rates are set at Treasury auctions

The Treasury does not straightforward decide what interest rate to pay. Instead, the rate is determined by auction—the market sets the price. When the Treasury announces an auction, it says how much it is borrowing but not the interest rate. Investors submit bids indicating how much they are willing to pay and what return they expect. The Treasury accepts bids from highest to lowest until it has raised the amount it needs, and the lowest accepted bid sets the interest rate for that security.

This means interest rates on Treasuries move constantly based on what investors demand. If inflation is rising, investors demand higher rates to protect the purchasing power of their money. If the economy is weakening and investors are nervous, they may accept lower rates just to park their money somewhere safe. If the Federal Reserve raises its benchmark interest rate, Treasury rates typically rise too, because investors can get better returns elsewhere.

The interest rate also depends on how long the loan lasts. A 10-year note will almost always have a higher interest rate than a 3-month bill, because the lender is taking on more risk and uncertainty over a longer period. This difference between short-term and long-term rates is called the yield curve, and it shifts constantly based on economic conditions and investor expectations.

The relationship between borrowing and the national debt

Every time the Treasury sells a security, it adds to the national debt. The national debt is straightforward the total amount of money the federal government has borrowed and not yet repaid. As of recent years, the national debt exceeds $33 trillion, and the vast majority of it is held in Treasury securities.

When a Treasury security matures, the government must repay it. If the government does not have enough cash on hand, it borrows again by issuing new securities. This is why the debt grows even when the government is not running a deficit in a particular year—old debt must be rolled over into new debt. The government is constantly refinancing its existing debt while also borrowing to cover any gap between spending and tax revenue.

Interest payments on the debt are now one of the largest categories of federal spending. In recent years, the government has spent hundreds of billions annually just on interest, and that amount grows as interest rates rise. This means money that could go toward defense, infrastructure, or social programs instead goes to paying investors who hold Treasury securities.

What happens if the government cannot borrow

The federal government's ability to borrow depends on investor confidence. If investors lose faith that the government will repay its debts, they will demand much higher interest rates or stop buying Treasuries altogether. This has happened in other countries—Greece, for example, faced a debt crisis when investors became unwilling to lend at any reasonable rate.

In the United States, this risk is low because the government can print money and collects taxes from a large, productive economy. However, if the debt grows much faster than the economy, or if political dysfunction makes investors doubt the government's commitment to repaying, borrowing costs could spike. Higher borrowing costs mean the government pays more interest, which crowds out spending on other priorities.

Congress also sets a legal limit on how much the federal government can borrow, called the debt ceiling. When the government approaches this limit, Congress must vote to raise it or the Treasury runs out of cash and cannot pay bills. This has created periodic political standoffs, though Congress has always eventually raised the ceiling to avoid default.

How Treasury borrowing affects the broader economy

When the government borrows heavily, it competes with private borrowers—businesses and individuals seeking loans. If the government is borrowing a lot, it can push up interest rates across the economy, making mortgages, car loans, and business loans more expensive. This is called crowding out. Conversely, if the government borrows during a recession when private borrowing is weak, it may have little effect on other interest rates.

Treasury borrowing also affects inflation. If the government borrows and spends money during a time when the economy is already running at full capacity, the extra spending can drive prices up. If it borrows during a recession when there is slack in the economy, the spending can help stimulate growth with less inflationary pressure. The timing and size of government borrowing matter for the overall health of the economy.

Foreign borrowing by the U.S. government also affects the value of the dollar and international trade. When foreign investors buy Treasuries, they are buying dollars, which increases demand for the dollar and tends to make it stronger. A stronger dollar makes American exports more expensive for foreign buyers but makes imports cheaper for American consumers.

Frequently Asked Questions

Can the federal government run out of money and default on its debt?

The U.S. government has never defaulted on its debt, and the risk is very low because it can collect taxes and has the world's largest economy backing its promises. However, if Congress did not raise the debt ceiling and the Treasury ran out of cash, the government would be unable to pay all its bills—including interest on existing debt—which would constitute a default. This would be a severe economic crisis.

Why do foreign countries buy U.S. Treasury securities?

Foreign governments and central banks buy Treasuries because they are extremely safe, liquid, and useful for managing currency reserves and international trade. Holding dollars and dollar-denominated assets helps countries conduct business in the global economy. They also buy Treasuries as investments that generate steady returns.

What is the difference between the national debt and the deficit?

The deficit is the amount by which spending exceeds revenue in a single year. The national debt is the total amount borrowed over all years combined. If the government runs a deficit, the debt grows. If the government runs a surplus (revenue exceeds spending), the debt shrinks, though this is rare.

Does the Federal Reserve borrowing money from the Treasury?

No. The Federal Reserve is a separate entity that buys and sells Treasury securities in the open market as part of managing interest rates and the money supply. When the Fed buys Treasuries, it is purchasing them from existing holders, not borrowing from the Treasury. The Fed can create money to buy Treasuries, but this is different from the Treasury borrowing.

What happens to Treasury interest rates when the economy is strong?

When the economy is strong, investors have more options for where to invest their money—stocks, corporate bonds, and other investments become more attractive. This reduces demand for Treasuries, pushing interest rates up. Additionally, a strong economy often leads the Federal Reserve to raise interest rates, which pulls Treasury rates up as well.