All treasury bond issues carry the full faith and credit of the United States. Since 1985, most of these issues have been non-callable. However, it is possible to add a call feature via derivatives, which are created by non-government issuers. Investors can also buy bonds that are protected against inflation (Treasury Inflation-Protected Securities).
Issued as Non-Callable
Since 1985, all bond issues financed by the United States and overseen by the U.S. Treasury Department have been issued as non-callable bonds. Such an arrangement provides the government with the most economical method of issuing bonds because investors can be assured of having their securities available though without the convenience of early redemption, referred to as a call feature.
The Legacy of Callable Bonds
Prior to 1985 U.S. Treasury bonds were issued with either a five-year or a 10-year call feature at par (the maturity value). Today, there are still outstanding bonds that are callable, though the Treasury has initiated purchases of callable bonds and reissued them as non-callable bonds. There is no guarantee that the government would not reinstate call features in the future. Doing so, however, might make the bonds less marketable and therefore more expensive.
Derivative Products
It is possible to add a call feature to a Treasury bond as part of a derivative. Derivatives are usually created by investment bankers to emphasize the maturity or income that a bond provides. A derivative is thus a bond composed of many other bonds, including those issued by the government, that through legal definition has had its cash flow altered. The terms of the derivative, however, have no legal binding on Treasury issuance. Derivatives merely describe in legal terms the conditions under which the proceeds of the bond are to be allocated among investors.
Treasury Inflation-Protected Securities (TIPS)
Today, the government also issues Treasury Inflation-Protected Securities (TIPS), which reflect the current rate of inflation. Inflation hurts bond values because the coupon stream of a bond is set at purchase and not adjusted for inflation. High inflation results in lower prices for bonds. Callable bonds protect the issuer by giving it the right to redeem bonds early and refinance them at a lower interest rate. Investors buying TIPS products can be confident that the value of their Treasury securities will be protected in a time of fluctuating interest rates.