Short term investment strategies

¶ … Investment Practices and Strategies in the U.S. Treasury

Treasury Tax & Loan (TT&L) notes

This program was established in 1978 to provide Treasury with an effective tax collection mechanism designed to assist in balancing the Treasury General Account (TGA). Through this program the Treasury collaborates with over 9000 commercial financial organizations whose mandate is tax payment collection. Almost ten percent of these institutions also hold funds and pay interest to Treasury. The program is divided into three sections collectors, retainers, and investors. The collectors, which make the majority receive payments from customers and remit the funds to Treasury's account. Retainers unlike the collectors retain specific amount subject to interest and the funds can be called by the Treasury. The investors, collect, retain and receive funds from the treasury through investment channels (United States Government Accountability Office, 2007).

One major advantage of this program is the ability to provide the Treasury with an effective federal tax payment collecting mechanism. It also helps Treasury achieve the target balance in the Treasury General Account. However, the program has some drawbacks, and one major one is that it subjects treasury to concentrating risks (State of Washington Office of Financial Management, 2010). It also possesses challenges with capacity, for example, in 2006 a third of Treasury operating funds were invested in this program's deposits with a proximately 8 billion daily average.

Term Investment Option (TIO) offering

This program was initiated in 2003 and unlike the TT&L, offers the Treasury a higher rate of return. These investments are auctioned and not placed at a fixed rate as the Treasury Tax & Loan. They cannot be called at will and are placed for a fixed number of days. Through this program, treasury gives away excess funds at a competitive rate for a fixed period through an auction. The programs format of auction provides the Treasury with an avenue of receiving competitive, market-based interest rate for excess funds. On the other hand, the associated financial institutions are advantaged as they get to know in advance the exact amount and timing of the investment.

An advantage that this program has over TT&L is that depositary institutions know exactly how long TIO funds will be deposited. They also have an influence over the amount of money they receive through bidding competitively. In addition, this program earns a high rate of return. However, just like the TT&L, it subjects treasury to concentrating risks.