Treasuries: A Secure Investment Option For Your Money

Treasury securities are considered one of the safest investments due to their backing by the US government. They are also known as T-bills and are short-term debt obligations with maturities of one year or less. T-bills are sold at a discount and can be bought and sold with ease in the secondary bond market. While they do not offer regular interest payments, they include built-in interest reflected in the amount paid at maturity. Treasury securities are subject to federal income tax but are exempt from state and local income taxes.

Treasury bills (T-bills)

Treasury bills, or T-bills, are short-term debt obligations issued by the US Department of the Treasury and backed by the US government. They have a maturity of one year or less and are sold at a discount from the par value of the bill. For example, a one-year T-bill with a par value of $1,000,000 may be sold for $950,000. The US government promises to pay the investor the full $1,000,000 at maturity. The difference between the face value and the discounted price is the interest earned by the investor.

T-bills are now only available in electronic form and can be purchased directly from the government at TreasuryDirect.gov or through a brokerage or bank account. They can also be bought and sold in the secondary market, where they are actively traded. T-bills are sold through non-competitive and competitive bidding auctions. In a non-competitive bid, the investor agrees to accept the discount rate determined at auction. In a competitive bid, investors buy T-bills at a specific discount rate that they are willing to accept.

T-bills are considered low-risk investments because they are backed by the US government, which guarantees the timely payment of principal and interest. They are also highly liquid, allowing investors to quickly access their funds and reinvest in other opportunities. However, T-bills have interest rate risk, meaning their rate could become less attractive in a rising-rate environment. T-bills do not offer periodic interest payments, but they do include built-in interest, reflected in the amount paid at maturity. The interest income is exempt from state and local income taxes but is subject to federal income taxes.

Treasury bonds (T-bonds)

Treasury bonds, or T-bonds, are fixed-income securities that are loans from citizens to the US government that are paid back with interest. They are considered low-risk investments but offer a comparatively low yield compared to other types of securities. T-bonds are debt obligations issued and backed by the full faith and credit of the US government. They are essentially loans from citizens to the government upon which interest is paid at regular intervals before the principal is returned to the citizen upon the bond's maturity.

T-bonds have original maturities of either 20 or 30 years and typically offer the highest interest rates of the three basic securities (the other two being T-notes and T-bills). Interest payments are made every six months. The 20-year T-bond is no longer offered but can be purchased on the secondary market. The 30-year T-bond is the longest-maturity Treasury security.

T-bonds are highly liquid, meaning they can be easily bought or sold in the secondary market before their maturity. They are actively traded on the open market, making them a flexible investment option.

Treasury notes (T-notes)

T-notes are issued by the US Treasury and sold at a discount to their face value, with the difference earned as interest upon maturity. They make interest payments twice a year at a fixed rate, providing a stable and nearly guaranteed source of income for investors. The yields on T-notes are set at Treasury auctions, which are open to the public, and they can be purchased in multiples of $100.

T-notes can be purchased through various avenues, including the TreasuryDirect website, banks, or brokers. They are also available as part of bond ETFs or through money market accounts. Investors can set up competitive bids through TreasuryDirect, specifying the yield they will accept, or opt for noncompetitive bids where the yield is determined by auction prices.

It is important to note that T-notes have lower yields than T-bonds due to their shorter maturity terms. However, they are still considered attractive investments, especially for those seeking predictable interest payments and a safe way to diversify their investment portfolios.

Interest rate risk

Treasury bills, or T-bills, are short-term debt obligations issued by the US Treasury and backed by the US government. They have a maturity of one year or less and are sold at a discount to their face value. This means that investors earn the difference at maturity, in a lump-sum interest payment. For example, if you wanted to buy $1,000 in T-bills that were currently yielding 5%, the US Treasury would sell them to you at a discounted price of $950. You would receive $1,000 at maturity, with the additional $50 representing your earned interest.

T-bills have a fixed rate of interest, which can provide a stable income. However, they are subject to interest rate risk. This means that if interest rates rise, the value of existing bond holdings will fall, and T-bills may become less attractive in a rising-rate environment. In other words, there is a danger that bondholders might lose out if there are higher rates in the future.

Long-term bonds are subject to greater interest rate risk than short-term bonds. This is because there is a greater probability that interest rates will change over their remaining duration. When interest rates rise, bond prices fall, and vice versa. This is because bond prices are inversely related to interest rates.

While T-bills are considered to have low credit or default risk, they generally offer lower yields relative to other bonds. T-bills are highly liquid investments, meaning they can be easily bought or sold in the secondary market before their maturity.

Tax advantages

US Treasury securities are taxed at the federal level but are exempt from state and local income taxes. This makes them particularly attractive to investors in high-tax states like California, New York, and Oregon. Treasuries can, therefore, offer higher after-tax yields than other investment options, such as certificates of deposit (CDs).

Treasury bills, notes, and bonds are issued in a wide range of maturities, from four weeks to 30 years. Notes are intermediate-term investments with maturities from two to 10 years, while bonds are long-term securities with maturities greater than 10 years. Treasury Inflation-Protected Securities (TIPS) are notes and bonds that provide inflation protection by adjusting the principal daily to reflect changes in the Consumer Price Index (CPI-U). The interest paid on TIPS is taxed as capital gains in the year the increase occurs, even if the investor does not collect these gains until the TIPS mature. This is known as a "phantom income" tax. On the other hand, decreases in the principal amount due to deflation can be used to offset taxable interest income from other investments.

Investors can purchase Treasury bills, notes, and bonds at auction, directly from the US government through TreasuryDirect, without going through a broker. They can also opt to have up to 50% of their Treasury bills' interest earnings automatically withheld. At the end of the tax year, the financial institution or bond issuer should send the investor a Form 1099-INT reporting all the taxable and tax-exempt interest received during the year.

Like other investments, the tax owed on bonds and bond funds can be deferred by holding them in a tax-advantaged retirement account, such as a 401(k) or IRA. If held in a tax-free account like a Roth IRA, income from taxable bond funds or individual bonds may be exempt from federal taxes, provided certain requirements are met.

Frequently asked questions