How the US Treasury Gets Dismembered and Sold in Pieces

A 30-year US Treasury bond pays interest every six months for 30 years, then returns the principal. That is 61 separate cashflows. Since 1985, the US Treasury has allowed registered broker-dealers to separate those cashflows and sell each one individually as its own security.

The program is called STRIPS — Separate Trading of Registered Interest and Principal of Securities. The acronym is forced, but the mechanism is elegant. Take a 30-year bond with a $1,000 face value paying 4% annually. Strip it apart and you have 60 semiannual coupon payments of $20 each, plus one payment of $1,000 due in 30 years. Each of those 61 pieces can be bought and sold on its own.

Each stripped piece is a zero-coupon bond — it pays nothing until maturity, but it trades at a deep discount to its face value. The longer until maturity, the steeper the discount. A STRIP maturing in 30 years might sell for $300 today to pay $1,000 at maturity.

Who buys them? Primarily pension funds and insurance companies. A fund with obligations to pay policyholders exactly $50 million in 2050 can purchase STRIPS that mature in 2050 and deliver that amount with certainty, without reinvestment risk. There's no coupon to reinvest at uncertain future rates.

As of early 2024, roughly $380 billion in Treasury STRIPS were outstanding, according to Treasury data. The program solved a real problem: before 1985, dealers would manually clip coupons and try to sell them informally — a practice the Treasury formalized rather than prohibited.