Foundations

The United States (U.S.) government is the largest securities issuer in the world and currently maintains a debt level of over $33 trillion. It borrows heavily to finance federal spending, including the military and social programs (e.g., Medicare, Medicaid, SNAP).

U.S. government debt is the most actively traded security in the world. Unlike municipal bonds, federal debt has virtually no liquidity risk. In other words, if you want to sell a U.S. government bond, you can typically find a buyer quickly because there’s a deep, active market for these securities.

A key feature of U.S. government debt is its lack of default risk. A default happens when an issuer can’t make required interest or principal payments, often because of bankruptcy. The federal government is unique because it can create its own currency (through the Federal Reserve), and U.S. dollars are demanded worldwide. Because these securities are viewed as very safe, U.S. government debt is generally treated as AAA* (the highest bond rating).

*In 2011, Standard & Poor’s (S&P) downgraded US government debt from AAA to AA+. In 2023, Fitch downgraded US government debt from AAA to AA+. Both organizations cited rising debt levels, political strife, and issues with the U.S. debt ceiling. Moody also downgraded it slightly to Aa1 in 2025, but regardless, you should assume U.S. Government securities maintain a AAA rating for exam purposes.

U.S. government debt is issued with the full and direct backing of the federal government, often considered the “gold standard” for credit quality. Even though national debt levels have been rising, you should assume default risk isn’t a factor for test purposes. As noted above (and discussed later in this unit), the U.S. government can create additional U.S. dollars, so it theoretically can’t run out of money - although political disputes can still create complications.

While the low default risk applies to all U.S. government debt, different types of federal debt have different features, along with their own risks and benefits. In the following chapters, you’ll learn how these securities compare and when each one is typically used.