Seven short chapters in plain language, with diagrams, worked numbers and a self-check quiz after each one. Figures checked 16 Oct 2026, each with its date and official source.
Education only — not financial advice. Numbers are rounded, and the "typical" market reactions described are historical tendencies, not rules.
0 · The basics in 5 minutes
A Treasury security is an IOU from the US government: you lend it dollars today and it promises to pay you back on a fixed date (the maturity), usually with interest along the way. There are three main families, named by how long the loan lasts:
T-bill (Treasury bill): 4 weeks to 1 year (52 weeks). No coupon: you buy it below face value, for example $98.00, and receive $100 at maturity. The $2 is your interest.
T-note (Treasury note): 2, 3, 5, 7 or 10 years. Pays a fixed coupon (interest) every six months.
T-bond (Treasury bond): 20 or 30 years, also with a six-monthly coupon.
Plus TIPS (Treasury Inflation-Protected Securities), whose principal rises with the CPI (Consumer Price Index), and FRNs (Floating Rate Notes), whose interest resets weekly with the 13-week bill rate.
The yield is the annual return you get if you buy at today's price and hold to maturity. Yields are quoted in percent and changes in basis points (bp): 1 bp = 0.01 percentage point, so a move from 4.50% to 4.75% is "+25 bp".
Real example: the 10-year note auctioned on 12 Aug 2026 has a 4.625% coupon and sold at $99.54 per $100 (yield 4.683%). Source: Fiscal Data, Treasury Securities Auctions Data.
Worked example — price falls when yields rise. A 10-year note pays a 4% coupon ($2 every six months per $100). If the market yield is 4%, it is worth exactly $100. If yields rise to 5.19% (the 10-year level on 14 Oct 2026), a buyer will only pay about $90.81, because at that price the $4 a year plus the $9.19 gain at maturity work out to 5.19% a year. If yields fall to 3%, the same note is worth about $108.58. The coupon never changes; the price adjusts.
Quiz
1. A 26-week bill: is it a bill, note or bond, and does it pay a coupon?
A bill (one year or less). No coupon: it is sold below $100 and pays $100 at maturity.
2. The 10-year goes from 5.19% to 5.07%. How many basis points, and did prices rise or fall?
−12 bp. Yields fell, so prices rose.
1 · Treasury vs the Fed: two different institutions
People often mix them up. They have different bosses, different jobs and different tools.
US Department of the Treasury
Federal Reserve ("the Fed")
What it is
Part of the executive branch: a government ministry led by the Secretary of the Treasury, appointed by the President.
The central bank. Created by Congress (Federal Reserve Act, 1913) but independent in its policy decisions. Governors serve 14-year terms.
Job
Collects taxes (via the IRS, Internal Revenue Service), pays the government's bills, and borrows whatever is missing by selling Treasuries at auction.
Keeps inflation low and employment high (the "dual mandate"); supervises banks; keeps the payment system working.
Main tools
How much to borrow and in what mix (bills vs notes vs bonds), the auction calendar, buybacks, its cash balance.
The federal funds rate (set by the FOMC, Federal Open Market Committee), interest paid on bank reserves, buying or shrinking its bond holdings (QE/QT).
Bank account
The TGA (Treasury General Account), held at the Fed. Balance on 14 Oct 2026: $886 bn.
It is the bank where the TGA and commercial banks' reserves sit.
The Fed cannot lend directly to the government
The Fed is not allowed to buy new Treasuries directly from the Treasury at auction (Federal Reserve Act, section 14: purchases are made "in the open market"). It can only buy existing ones from investors in the secondary market. When it does this on a large scale to push long-term rates down, it is called QE (quantitative easing). Letting bonds mature without replacing them is QT (quantitative tightening). On 14 Oct 2026 the Fed held $4.57 trillion of Treasuries (Fed H.4.1 release). When its bonds mature, the Fed may "roll over" into new issues; that is a reinvestment, not new lending.
Profits, losses and the "deferred asset"
The Fed earns interest on its bonds and pays interest on bank reserves and on its RRP (reverse repurchase agreement) facility. After covering its costs it sends its profits to the Treasury ($107.4 bn for 2021, Fed press release, 14 Jan 2022). Since early September 2022 (first weekly loss in the H.4.1 week of 7 Sep 2022, FRED RESPPLLOPNWW) the rates it pays have been higher than what it earns on its older, low-coupon bonds, so it has run losses. It doesn't need new capital for this: it records a deferred asset, an IOU to itself that future profits must pay off before remittances to Treasury restart. On 14 Oct 2026 the deferred asset stood at $233 bn (Fed H.4.1, "earnings remittances due to the US Treasury"). For the government, that means less non-tax income — one reason the deficit is larger.
How a deficit is financed — follow the money
A deficit is a loop: savers lend dollars to Treasury, Treasury spends them, and the dollars return to the private sector. The Fed only runs the plumbing; it isn't a buyer at the auction.
The debt ceiling
Congress decides spending and taxes and, separately, sets a legal cap on total borrowing: the debt limit or "debt ceiling". It does not authorise new spending; it only allows Treasury to borrow for spending Congress has already approved. When the cap is reached, Treasury uses "extraordinary measures" (accounting moves such as pausing investments of some federal pension funds) and draws down the TGA, until Congress raises or suspends the limit. The X-date is the day those resources run out. The 2025 budget law (One Big Beautiful Bill Act, Public Law 119-21) raised the limit by $5 trillion to $41.104 trillion. On 14 Oct 2026 total public debt was $40.33 tn, but not all of it counts: unamortised discount on bills and zero-coupon issues ($194 bn) and some Federal Financing Bank debt are excluded. Debt subject to the limit: $40.13 tn, leaving about $0.97 tn of room (Daily Treasury Statement, table III-C, 14 Oct 2026). At a $1.9 tn yearly deficit, that is roughly six months of borrowing, so another debt-limit episode is likely in 2027.
Quiz
1. Can the Fed buy a newly auctioned 10-year note directly from Treasury?
No. It can only buy existing Treasuries from investors in the secondary market (QE).
2. What is the TGA, and where is it held?
The Treasury General Account, the government's main bank account, held at the Federal Reserve.
3. Why has the Fed stopped sending profits to Treasury since 2022?
It pays more interest on reserves and RRP than it earns on its bonds, so it has losses, recorded as a deferred asset that must be paid off first.
4. Does raising the debt ceiling authorise new spending?
No. It only lets Treasury borrow to pay for spending and tax laws Congress already passed.
2 · Who owns US debt — and who receives the interest
Total public debt on 14 Oct 2026: $40.33 trillion. It splits in two:
Intragovernmental holdings, $7.85 tn (19%): debt the government owes to its own trust funds, mainly Social Security, federal civilian and military pensions, and Medicare. When these funds ran surpluses they had to invest them in special non-marketable Treasuries. It is a real promise to future retirees, but no market investor holds it.
Debt held by the public, $32.48 tn (81%): marketable bills, notes, bonds, TIPS and FRNs plus savings bonds — what investors trade.
Selected holders of Treasuries, $ trillion. Fed: H.4.1, 14 Oct 2026. Foreign: TIC, July 2026. Others: Fed Financial Accounts (Z.1, table L.210), Q2 2026. Categories come from different sources and dates, so they don't add up exactly to the total.
Holder
$ tn
Date · source
Notes
Foreign investors (all)
9.25
Jul 2026 · TIC
Of which foreign official (central banks, sovereign funds) 3.77.
Federal Reserve
4.57
14 Oct 2026 · H.4.1
Bought through QE in 2008–14 and 2020–22.
Money market funds
3.28
Q2 2026 · Z.1
Mostly bills (2.32). This is where much of Americans' "cash" sits.
Households & nonprofits
2.83
Q2 2026 · Z.1
A residual in the Fed's accounts that also includes hedge funds.
Banks (US-chartered)
1.80
Q2 2026 · Z.1
Used as liquid reserves and collateral.
Mutual funds (bond funds etc.)
1.74
Q2 2026 · Z.1
State & local governments
1.65
Q2 2026 · Z.1
Pension funds
1.15
Q2 2026 · Z.1
Private 0.59 + state & local pensions 0.56.
Insurers
0.61
Q2 2026 · Z.1
Life 0.23 + property & casualty 0.38.
Foreign holders by country (TIC, end-July 2026, $ bn)
Source: Treasury International Capital (TIC) system, Major Foreign Holders table, released Sep 2026. Custody centres (UK, Belgium, Luxembourg, Cayman Islands) hold on behalf of investors elsewhere, so country figures are approximate (TIC FAQ 7). China's holdings fell from $700 bn in Aug 2025 to $618 bn.
Interest: how big, and who receives it
Interest expense, fiscal year 2026 (Oct 2025–Sep 2026): $1.07 trillion on debt held by the public, or $1.36 trillion including interest credited to the trust funds (Fiscal Data, Interest Expense on the Public Debt Outstanding, 30 Sep 2026). That's about $2.9 bn a day.
Net interest vs defence (Monthly Treasury Statement, first 11 months of FY2026 to 31 Aug): net interest $1,017 bn vs national defence $876 bn. Interest now costs about 16% more than the military.
Share of revenue: total receipts over the same 11 months were $4,845 bn, so about 21 cents of every tax dollar went to interest.
Average rate on marketable debt: 3.52% on 30 Sep 2026 (bills 3.87%, notes 3.38%, bonds 3.47%; Fiscal Data, Average Interest Rates). It is still below today's market yields, so it keeps rising as old debt is refinanced.
CBO (Congressional Budget Office, Feb 2026) projects net interest rising from $1.0 tn (3.3% of GDP) in 2026 to $2.1 tn (4.6%) in 2036.
Who receives it? Whoever holds the bonds, in proportion: foreign investors (roughly 28% of debt held by the public), American money-fund savers, pension funds paying retirees, banks, insurers, households — and the Fed, which today hands nothing back to Treasury because of its losses. Interest is a transfer from taxpayers to bondholders. A dollar of interest paid to a US pension fund stays in the economy; one paid to a foreign central bank doesn't.
Quiz
1. Roughly what share of total public debt is intragovernmental, and who is the main holder?
About 19% ($7.85 tn of $40.33 tn), mostly the Social Security trust funds and federal pension funds.
2. Which country is the largest foreign holder?
Japan, at $1.10 tn (Jul 2026), ahead of the UK ($1.00 tn, partly a custody centre) and China ($0.62 tn).
3. Is interest bigger or smaller than defence spending now?
Bigger: $1,017 bn vs $876 bn over the first 11 months of FY2026.
3 · What if the US stopped paying interest?
Two very different "defaults"
Technical default: Treasury has the money and the will to pay, but a legal or operational problem delays a payment. This happened in a small way in 1979: payments on about $122 m of T-bills held by individual investors, maturing on 26 April, 3 May and 10 May 1979, went out late because of back-office problems (an automation project, an office relocation and failed word-processing equipment). It was fixed within three weeks. A 1989 study (Zivney & Marcus, Financial Review) found bill yields rose about 60 bp and never fully came back down. The Congressional Research Service points out that the Fed's anti-inflation policy shift at the time probably explains more of the rise.
Debt-ceiling default: Congress does not raise the limit, the X-date arrives, and Treasury has cash coming in from taxes but not enough to pay everything.
Real (solvency) default: the government cannot or will not pay. Because US debt is in dollars, which the US itself issues, it can't run out of dollars the way Greece (in euros) or Argentina (in dollars) did. The limit is political, and the real constraint is inflation.
Near-misses
Episode
What happened
Market impact
2011
Treasury projected it would exhaust its borrowing authority on 2 Aug 2011 (Treasury, 1 Jun 2011). The Budget Control Act was signed that same day.
S&P cut the US from AAA to AA+ on 5 Aug 2011. Treasuries rallied anyway (flight to safety), as the 10-year chart on the dashboard shows.
2023
Secretary Yellen put the X-date at 5 June 2023 (letter of 26 May 2023). The Fiscal Responsibility Act was signed on 3 Jun 2023, suspending the limit to 1 Jan 2025.
Fitch cut AAA to AA+ on 1 Aug 2023, citing "repeated debt-limit standoffs" and governance.
2025
Limit raised by $5 tn in July 2025 (P.L. 119-21).
Moody's, the last of the three, cut Aaa to Aa1 on 16 May 2025, citing rising deficits and interest costs.
What would break
Why even a short technical default would hurt: Treasuries are the "cash-like" collateral at the base of the financial system.
Collateral and repo: banks, dealers and hedge funds borrow overnight against Treasuries (the repo market; its benchmark rate is SOFR, the Secured Overnight Financing Rate). A defaulted bill is suddenly bad collateral, and lenders demand bigger haircuts or stop lending.
Money market funds hold over $2 tn of bills. A missed payment could make one fall below $1 a share ("break the buck") and trigger runs, as in 2008.
Yields and ratings: investors would demand a permanent premium, raising the cost of the whole $32 tn of debt held by the public, along with mortgages and corporate loans.
The dollar: its role as the world's reserve and settlement currency rests on trust that Treasuries are always paid.
Why a real default is unlikely: the debt is in dollars and the Fed can always create dollars, so the risk is a self-inflicted political accident (the debt ceiling), not an inability to pay. The economic price of too much debt shows up as inflation, higher yields and a weaker dollar, not as missed payments.
Quiz
1. Which agency first downgraded the US, and when?
S&P, 5 August 2011 (AAA → AA+). Fitch followed on 1 Aug 2023 and Moody's on 16 May 2025.
2. Why did Treasury yields fall during the 2011 crisis, which was about Treasuries?
Flight to safety: in a panic, investors still had nothing safer and more liquid to buy.
3. Name two channels through which a missed payment would spread.
Repo and collateral markets, money market funds (and also higher yields everywhere and a weaker dollar).
4 · Inflation makes debt smaller: "bigger in figures, smaller in real terms"
A bond is a promise to pay a fixed number of dollars. Inflation doesn't change that number, but it raises prices, wages and the taxes collected on them. The debt stays the same "in figures" while the economy carrying it grows, so it shrinks in real terms: in what it can buy and relative to income.
Worked example. A country has debt of $100 and nominal GDP (all income, at today's prices) of $100: debt/GDP = 100%. Over 5 years, real growth is 3% a year and inflation 5%, so nominal GDP grows about 8% a year.
• Nominal GDP after 5 years: 100 × 1.08⁵ = $146.9. Tax revenue grows with it.
• If the government runs no new deficit and the debt is long-term at a fixed low coupon: debt stays $100 → debt/GDP = 100 / 146.9 = 68%.
• Real value of that $100: 100 / 1.05⁵ = $78 in today's money. Bondholders lost 22% of their purchasing power.
• But if the debt is short-term and rolls at 6% a year, with interest paid by borrowing more: debt grows to 100 × 1.06⁵ = $133.8 → debt/GDP = 91%. Most of the "inflation gain" disappears.
Debt held by the public, % of GDP. 1946–1960: OMB Historical Tables, table 7.1 (FY2025 Budget). 1965–2025: CBO historical budget data, Feb 2026 (CBO's series starts in 1962). 2026 and 2036: CBO projections (Feb 2026). After WWII the debt actually rose in dollars, from $241.9 bn (FY1946, OMB; FRED FYGFDPUB) to $343.7 bn (FY1974, CBO), but the economy outgrew it with inflation and growth, while the Fed held yields down until the 1951 Treasury–Fed Accord.
Why it works less well today
Rollover: about a third of marketable debt matures within 12 months (see chapter 5). New debt is sold at today's higher yields, so inflation shows up in the interest bill fast.
TIPS ($2.17 tn on 30 Sep 2026, ~7% of marketable debt) are indexed: inflation raises what the government owes on them.
Indexed spending: Social Security benefits rise with CPI, so spending inflates along with revenue.
Markets react: bond investors who fear inflation demand higher yields (the breakeven and term premium in the dashboard). After WWII, capital controls and rate caps ("financial repression") kept them captive; today's markets are open.
Who loses
Holders of fixed nominal claims: bondholders, savers in deposits and money funds whose rate lags inflation, and people on fixed pensions. Winners are fixed-rate borrowers, including the government and households with 30-year fixed mortgages. For a Bitcoin or gold holder, this "debasement" story is the core thesis: assets with fixed supply are bought as protection against a slow, deliberate erosion of the currency. Note, though, that high real yields (2.84% on 14 Oct 2026) mean bonds currently pay well above expected inflation.
Quiz
1. Debt $100, nominal GDP $100, then 10% nominal growth for one year with no new borrowing. New debt/GDP?
100 / 110 = 91%.
2. Why does short-maturity debt weaken the "inflate it away" effect?
It gets refinanced quickly at the new, higher yields, so interest costs rise along with inflation.
3. Name two losers from unexpected inflation.
Holders of fixed-rate bonds and savers whose deposits earn less than inflation (also fixed-income pensioners).
5 · Auctions and high yields: why Treasury can't just wait
How an auction works
Treasury chooses how much; the market chooses the price.
Competitive bids name a yield; non-competitive bids (small investors, up to $10 m, for example via TreasuryDirect) accept whatever yield results.
Primary dealers (about two dozen big banks and brokers that trade with the New York Fed, list) must bid at every auction, so it always gets covered.
Indirect bidders are mostly foreign central banks and funds bidding through dealers; direct bidders bid on their own behalf.
Bid-to-cover = total bids ÷ amount sold. Compare it with recent auctions of the same maturity: a falling ratio means weaker demand. A "tail" (a stop-out yield above the market just before the auction) signals weak demand.
Real example — 10-year auction, 12 Aug 2026 (Fiscal Data, Auctions): $42 bn offered, bid-to-cover 2.53. The high yield was 4.683%, so the coupon was set at 4.625% (always rounded down to the nearest 1/8%) and the price at $99.54. Indirect bidders took ~77%, direct ~15% and primary dealers ~9%. Cost of high yields: that $42 bn costs taxpayers 4.625% × 42 = $1.94 bn a year for 10 years. Sold at 2.5%, it would have cost $1.05 bn. Today, with the 10-year at 5.19%, a new 10-year would cost about $2.2 bn a year. And an old 4% note re-opened today would sell at ~$90.81, so Treasury would have to sell more face value to raise the same cash.
Why Treasury can't "hold off" until yields fall
The deficit must be financed. CBO projects a $1.9 tn deficit for FY2026, about $160 bn a month. Bills come due whether yields are high or low.
Maturing debt must be rolled over. On 30 Sep 2026, $7.12 tn of bills plus $3.52 tn of notes and bonds were due within 12 months: $10.6 tn, about 33% of the $31.8 tn of marketable debt (Fiscal Data, Monthly Statement of the Public Debt). Treasury has to borrow that again just to stand still.
The cash buffer is finite. The TGA ($886 bn on 14 Oct 2026) covers only a few weeks of net spending.
Treasury's real levers
Mix: sell more bills (cheap when the curve is steep, but reprice quickly) or more coupons (notes and bonds, which lock in the rate). The TBAC (Treasury Borrowing Advisory Committee, a group of dealers and investors that advises Treasury) recommended in Nov 2020 a bill share of 15–20% of marketable debt over the medium term, with room to go modestly above it (TBAC charge, Q3 2024). The share was 22.2% on 31 Jul 2026 (Treasury presentation to TBAC, Aug 2026) and 22.4% on 30 Sep 2026 (MSPD). TBAC's Aug 2026 report says coupon auction sizes may need to rise in FY2027.
Buybacks: since 2024 Treasury regularly buys back old, illiquid issues to improve market liquidity and manage cash. They're small, so they don't change the total debt much.
TGA: run the cash balance down or up to smooth weeks of heavy payments or tax receipts.
What it does not do: time the market. Treasury follows a "regular and predictable" schedule (its stated policy, announced at each quarterly refunding) because surprises would make investors demand a premium on every auction. Predictability is cheaper over the long run than trying to guess the low point in yields.
Quiz
1. Who decides the size of an auction, and who decides the yield?
Treasury decides the size; bidders in the auction set the yield.
2. A $60 bn auction receives $150 bn of bids. Bid-to-cover?
150 / 60 = 2.5.
3. Roughly what share of marketable debt must be refinanced within a year?
About a third ($10.6 tn of $31.8 tn on 30 Sep 2026).
4. Why doesn't Treasury pause issuance until yields fall?
The deficit and maturing debt have to be paid now, the TGA buffer lasts only weeks, and a predictable schedule lowers the premium investors demand.
6 · Back to the yield curve: how to act on it
Everything above shows up in the curve on the live dashboard:
Fed expectations live in the 2-year. Compare it with the fed funds rate: above = hikes priced, below = cuts priced.
Deficits, supply and inflation risk live in the 10- and 30-year and in the term premium. Watch refunding days (next 2 and 4 Nov 2026) and weak auctions (low bid-to-cover, tails).
Inflation vs real money: split the 10-year into real yield (TIPS) and breakeven. A rising real yield is tight money (bad for gold, Bitcoin and growth stocks); a rising breakeven is an inflation scare.
Name the regime each month (bull/bear, steepening/flattening) and look up the typical reactions in the playbook.
Reading 14 Oct 2026 with this course: the 10-year rose 22 bp and the 2-year 17 bp in a month (bear steepening). The real yield is 2.84%, the 2-year is 94 bp above fed funds (more hikes priced), and the 30-year is above 5% with a $1.9 tn deficit to fund. That's a picture of tight money plus supply worries. Historically that has been a headwind for long bonds, growth stocks, gold and Bitcoin and has supported the dollar, with pressure on emerging markets like Vietnam. These are tendencies, not forecasts.
Acting on it, for a long-term investor: use the regime to adjust how much risk you hold, not to trade every move. Keep the duration of your bonds in line with your time horizon, and remember that high real yields make short Treasuries (or a euro money fund for a France-based investor) a real alternative to holding cash. If you buy US assets from France, think about the EUR/USD risk.
Quiz
1. Which part of the curve best reflects expected Fed policy?
The 2-year (and shorter).
2. The 10-year rises because breakevens rise while the real yield is flat. Inflation scare or tighter money?
An inflation scare.
3. Long yields rise more than short ones. What is the regime called?
Ratings: S&P (5 Aug 2011), Fitch (1 Aug 2023), Moody's (16 May 2025) press releases.
History: OMB Historical Table 7.1 (via FRASER); CBO historical budget data (GitHub US-CBO/cbo-data, Feb 2026); Zivney & Marcus (1989); CRS R44704; Treasury debt-limit releases (1 Jun 2011, 26 May 2023); TBAC documents (Q3 2024, Aug 2026); Fed press release on 2021 remittances (14 Jan 2022); DTS table III-C (debt subject to limit).
Limits: holder categories mix dates and sources; Z.1 "households" is a residual that includes hedge funds; TIC custody bias; the FY2026 net-interest and defence comparison uses 11 months because the September statement wasn't out yet when checked.