Introduction
Governments not only regulate the financial markets and their intermediaries, but they are also major financial intermediaries themselves. Different types of governments including federal, state and local have continue to play a very huge role within the financial markets through the issuance of securities.
The securities issued by the state and federal governments are used to finance public debt and also fund the ongoing activities of that particular government. Because these securities are often backed by the full credit and faith of the government, they often offer lower interest rates than bonds and securities offered by the corporate sector (Mishkin 2009). This indeed completes one role of these securities in the financial markets and that is to help out investors who cannot afford corporate securities. The other role of these bonds is that they are often used by investors to grant allocations to their investment assets and therefore lessen the overall risk.
When governments issue securities, they also complete another important function within the financial market. They set the benchmark for the pricing levels of the private sector instruments of debt. In doing so, the government bonds essentially catalyze the financial markets and system development (Houthakker & Williamson 2000).
These securities affect everyone in a number of ways. The main one is that the funds generated from these debt instruments is used to fund federal, state and local government projects that essentially benefit everyone. These projects include infrastructure development and other projects that help to maintain the well being and the life quality of every single one of us.
As seen, the major effects of these government securities are mainly felt in the bond and financial markets.
The bond market forms an important core of the global financial system. One very attractive feature of government bonds in the bond markets is the security they offer. According to the trading online market website (2013), there is absolutely no way anyone can lose money invested in these government bonds unless a default is declared by the government, otherwise, one’s investment is usually very safe. In the bond markets, the bonds are usually sold through auctions. The treasury first announces the amount of money that the government is willing to borrow. Later, the various lenders make a proposal of the amount that that are willing to lend and the rates of interest they wish to make. These applications are then field and finally, an announcement of results is made.
In the mortgage financial markets, the government participates for example by issuing the Federal Housing Administration mortgage insurance and also the guarantee of the timely payment of interest and principal on the various securities backed by loans of that kind through the Government National Mortgage Association, most commonly referred to as the Ginnie Mae ( Federal Bank of Atlanta 2013).These government programs are usually very self sustaining and are very popular with the low to moderate income and also first time home buyers. The government also participates in the mortgage markets by securitization which is actually issuing guarantees of credit against various mortgage pools.
The issuance of securities by governments is a continuous venture. Some of the securities recently issued by federal governments include treasury bills and government notes, savings bonds and also various mortgage securities. The state and local governments have also been issuing special kind securities known as municipal bonds. These bonds are particularly very popular because they are usually exempted from federal taxation and therefore incur low tax rates. There has also recently been the issuance of securities known as State and Local Government Series (SLGS) are actually non marketable treasury securities. Other securities recently issued are the Treasury Inflation Protected Securities (TIPS).
References
Redefining the Scope of Government Intervention in Secondary Mortgage Markets - Federal Reserve Bank of Atlanta. (2013, February 21). Retrieved June 6, 2013, from http://www.frbatlanta.org/news/speeches/frame_052710.cfm
The role of bonds in the financial markets – TMO. (2013, March 2). Retrieved June 6, 2013, from http://www.tradingmarketonline.com/the-role-of-bonds-in-the-financial-markets/
Mishkin, F. (2009). Financial markets and institutions. Boston: Pearson Prentice Hall.
Houthakker, H. S., & Williamson, P. J. (2000). The economics of financial markets. New York: Oxford University Press
The Role of Bonds in America. (2011, March 23). Retrieved June 6, 2013, from http://www.investinginbonds.com/learnmore.asp?catid=3&id=50
