The U.S. government borrows money by selling Treasury securities to investors around the world

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 Treasury Department sells these securities to banks, investment firms, individual investors, foreign governments, and the Federal Reserve. Buyers lend money to the government because they receive a may provide payment and interest in return. This is the primary way the U.S. government finances its operations when revenue falls short.

The government does not borrow from a single lender or explore for a loan the way a person or business would. Instead, it holds regular auctions where investors bid on Treasury securities. The government decides how much money it needs to borrow, sets the terms, and lets the market determine the interest rate based on demand. If many investors want to buy, the interest rate stays lower. If few investors are interested, the government must offer a higher rate to attract buyers.

Key Takeaways

  • The Treasury Department sells Treasury securities—bonds, notes, and bills—to raise money when government spending exceeds tax revenue.
  • Treasury securities are auctioned regularly, with terms ranging from a few weeks to 30 years, and buyers receive may provide repayment plus interest.
  • The Federal Reserve, foreign governments, banks, and individual investors all purchase Treasury securities, making the U.S. government's largest creditors diverse.
  • The government repays borrowed money through future tax revenue and by issuing new securities to cover maturing debt, a cycle that continues as long as borrowing continues.

Three types of Treasury securities and how they work

The Treasury Department issues three main types of securities, each with different time frames. Treasury bills mature in less than one year—typically 4, 8, 13, or 26 weeks. Treasury notes mature in 2, 3, 5, 7, or 10 years. Treasury bonds mature in 20 or 30 years. The longer the time until maturity, the higher the interest rate the government must offer, because investors are lending money for a longer period and taking on more risk.

When you buy a Treasury security, you pay a price and receive interest payments at set intervals. For example, a 10-year Treasury note might pay interest twice per year. When the security matures, the government returns your original investment. Treasury securities are considered very safe because they are backed by the U.S. government's ability to tax and borrow, and the government has never defaulted on its debt.

Who buys Treasury securities

Treasury securities are bought by a wide range of lenders. The Federal Reserve—the nation's central bank—purchases Treasuries as part of its monetary policy operations. Foreign governments, particularly China and Japan, hold large amounts of U.S. Treasury debt. Banks, pension funds, insurance companies, and mutual funds buy Treasuries as safe investments. Individual investors can purchase Treasury securities directly through TreasuryDirect, a government website, or through a bank or broker.

The diversity of buyers matters because it means the U.S. government does not depend on any single lender. If one major buyer reduces its purchases, others typically step in. However, if overall demand for Treasuries falls sharply—for example, if investors lose confidence in the government's ability to repay—the government would have to offer much higher interest rates to attract new buyers, which increases the cost of borrowing.

How the government repays borrowed money

The government repays Treasury securities using tax revenue collected by the Internal Revenue Service and other federal agencies. When a Treasury security matures, the Treasury Department sends the investor their original investment plus any final interest payment. However, the government does not set aside money in advance to repay maturing debt. Instead, it uses current tax revenue and, if necessary, borrows new money by issuing new securities.

This creates a cycle: as old securities mature and are repaid, the government issues new ones to cover the repayment and to finance any ongoing budget shortfall. This process is sometimes called "rolling over" the debt. As long as investors continue to buy new securities, the government can repay old ones. If investors stop buying, the government would face a serious problem—it would not have enough cash to pay back maturing debt without cutting spending or raising taxes when ready.

The relationship between borrowing and the national debt

Every time the government borrows money, it adds to the national debt—the total amount of money the federal government owes to all its creditors. The national debt grows whenever the government runs a budget deficit, meaning it spends more than it collects in taxes. The debt shrinks only when the government runs a budget surplus, meaning it collects more in taxes than it spends. Budget surpluses are rare in modern U.S. history.

The national debt is not a single loan from a single lender. It is the sum of all outstanding Treasury securities plus other obligations the government has taken on. Because the government has run budget deficits for most years since the 1960s, the national debt has grown substantially. The size of the debt affects interest rates throughout the economy—when the government borrows heavily, it can push up interest rates for mortgages, car loans, and business loans.

The debt ceiling and how Congress controls borrowing

Congress sets a legal limit on how much money the federal government can borrow, called the debt ceiling. When the government approaches this limit, Congress must vote to raise it or suspend it to allow more borrowing. This is a separate vote from the budget itself—it does not decide how much the government spends, only whether it can borrow to cover the difference between spending and revenue.

The debt ceiling has been raised or suspended many times since it was first established in 1917. When Congress does not raise the ceiling and the government reaches the limit, the Treasury Department must stop issuing new securities and cannot pay all its bills on time. This creates a crisis because the government cannot borrow to cover its obligations and does not have enough tax revenue to pay everything at once. Congress typically raises or suspends the ceiling to avoid this situation, though the process is often contentious.

Why the U.S. government can borrow so much

The U.S. government can borrow more money than most other borrowers because investors view it as extremely safe. The government has a large, stable economy and a long history of repaying its debts on time. It can collect taxes from hundreds of millions of people and thousands of businesses. It also has the power to print money through the Federal Reserve, though this power is limited and using it too much causes inflation.

Foreign investors are willing to lend to the U.S. government because Treasury securities are liquid—they can be bought and sold easily—and because the U.S. dollar is the world's primary currency for international trade. This gives the U.S. government advantages that other countries do not have. However, these advantages have limits. If the national debt grows too large relative to the size of the economy, or if investors lose confidence in the government's willingness to repay, borrowing costs would rise sharply and the government would face serious fiscal problems.

Frequently Asked Questions

Can individuals buy Treasury securities directly?

Yes. You can purchase Treasury bills, notes, and bonds directly from the U.S. government through TreasuryDirect.gov without paying a broker fee. You can also buy them through a bank or investment broker, though you may pay a small fee. Minimum purchase amounts vary by security type but are often $100 or less.

What happens if the government cannot repay its debt?

If the government cannot repay maturing Treasury securities, it would be in default—a situation that has never occurred in U.S. history. A default would damage the government's credit rating, cause interest rates to spike, and create economic turmoil. Congress raises the debt ceiling to prevent this scenario.

Does borrowing money hurt the economy?

Government borrowing has mixed effects. It can stimulate the economy during recessions by allowing the government to spend when tax revenue is low. However, heavy borrowing can crowd out private investment and raise interest rates for businesses and consumers. The long-term effects depend on how the borrowed money is spent and how large the debt becomes relative to the economy.

Why do foreign governments hold U.S. Treasury securities?

Foreign governments buy Treasuries as safe investments and to hold reserves of U.S. dollars, which they use for international trade and to stabilize their own currencies. Holding Treasuries also gives them a financial stake in U.S. economic stability. China and Japan are among the largest foreign holders of U.S. debt.

How much does the government pay in interest on its debt?

Interest payments vary based on how much debt the government holds and what interest rates are. In recent years, interest payments have grown as both the debt and interest rates have increased. These payments come from the federal budget and compete with spending on other programs like defense, Social Security, and infrastructure.