The encyclopedia · Finance & Accounting · Financial decision · 1985
Treasury let the market split bonds into zero-coupon pieces and STRIPS were born
In 1985 the Treasury let bonds be held as separate interest and principal components in the Fed's book-entry system, creating an official zero-coupon market.
U.S. Department of the Treasury · Federal Reserve Bank of New York
The solution
Private dealers had invented zero-coupon Treasury packages — bonds with the coupons stripped and resold separately — but each package was a synthetic product with extra steps and risk.
On January 15, 1985, Treasury Secretary Donald Regan announced STRIPS: the government would maintain eligible securities in the Federal Reserve's book-entry system so that interest and principal payments could be traded and owned separately, each with its own CUSIP number. A 10-year note, for example, could be held whole or as 21 separate payments.
Regan said the program 'reduces the cost to the government of financing the public debt by facilitating competitive private market initiatives with a minimum of direct government involvement.' The bond market rose on the announcement.
Why it worked
- Direct obligations of the U.S. are more trusted than private packages.
- Separate CUSIPs make the pieces tradeable and settleable.
- The government pays nothing to build the market — dealers do.
- Lower financing costs follow from deeper, more liquid demand.
What can be applied
A minimal institutional change — separate identifiers and book-entry custody — can formalize and cheapen a market that intermediaries were already improvising.
Aftermath
STRIPS became a standard tool for pension funds and insurers that want to match long-dated liabilities exactly. The zero-coupon market it enabled remains a benchmark for duration hedging and long-term savings products.
Sources
- The Treasury Department announces STRIPS program
- Federal Reserve Bank of New York Circular No. 9796 — Treasury Announces New STRIPS Program
spotted an error? The archive wants to know.