Investors line up to make loans to the US government. The US Department of the Treasury issues various debt securities to raise money that, along with taxes, helps pay for government operations.
The amount the Treasury can borrow – known as the public debt – is authorized by Congress, as is the annual budget that determines how much the government needs to raise.
Investors of all types – individuals, corporations, state and local governments, Federal Reserve Banks, and non-US governments and institutions – own Treasury issues. They’re sometimes described as safe harbor investments because they’re considered essentially free of credit risk and safe from default.
Like all debt securities, though, individual US issues are subject to market risk, which means their market prices and yields are affected by changing interest rates and investor demand.
What are US Treasury securities and how do they work?
A great strategy to invest and save money for the future is to purchase the US. Treasury securities. Treasury securities are obligations that are guaranteed by the full faith and credit of the United States government. Therefore, the United States government will look after its bondholders regardless of recession, inflation, or war. Interest may be paid at maturity or twice a year, depending on the type of security. Treasury security interest is subject to federal taxation but is free from state and local taxes.
Since they are among the safest investments available due to their minimal risk, Treasury bonds generally provide lower yields than other bonds. The TreasuryDirect.gov website, which the government runs, is the best place to purchase Treasury securities. The majority of banks and brokers also sell Treasury securities.
According to the maturity period, Treasury securities are divided into three major groups: Treasury Notes, Treasury Bonds, and Treasury Bills. Short-term T-Bills have maturities of only a few days, four weeks, 13 weeks, 26 weeks or 52 weeks. T-Notes, which come in maturity terms of two, three, five, seven, and ten years, represent the medium range of maturities in the Treasury family. Finally, Treasury Bonds are long-term, fixed-principal securities issued with a 30-year maturity.
What are the main types of Treasury securities?
The US Treasury offers six types of marketable securities that can be held to maturity or traded in the secondary market after the issue. They differ in the length of term, the frequency with which they’re offered, the interest rates they pay, and when the interest is paid.
Want your money to grow?
See how I can help you to make your money work for you
Managed Investment Accounts – unlock the power of professional asset management. Let me make you money while you enjoy your life.
Stock and Futures Market Research – use my technical and fundamental analysis to pick up swing trades with the best risk/reward ratio.
The range of issues includes bonds, with 30-year terms, notes, with 2-, 3-, 5-, 7-, or 10-year terms; and bills, with 4-, 13-, 26-, and 52-week terms. You can also buy inflation-indexed notes and bonds known as TIPS (for Treasury Insurance Protected Securities). They’re available with maturities of 5, 10, or 20 years. The newest type – floating rate notes (FRN) – was introduced in 2014.
They’re issued with 2-year terms, and unlike other notes, their interest rate changes quarterly, based on the 13-week T-bill rate, and is paid quarterly. Bills, notes, and bonds – including TIPS notes, bonds, and FRNs – are sold in $100 increments, and you can invest as little as $100 or as much as $5 million each time you make a purchase. You buy bills at a discount to par and receive par at maturity. The difference between those amounts is the interest. Interest on bonds and notes, except FRNs, is paid semi-annually at a fixed rate. With TIPS, the principal is adjusted twice a year based on changes in the Consumer Price Index (CPI), and
interest is paid semi-annually on the inflation-adjusted principal.
Like Treasury bills, Treasury STRIPS are zero-coupon securities sold at a deep discount. They’re available only through a financial institution or broker-dealer. You aren’t paid interest in regular installments over the term. Instead, the interest accumulates, and you receive it in a lump sum at maturity. However, you owe taxes each year on the accruing interest. STRIPS are free from credit risk, but market prices can be volatile during the issue’s term.
What are on-the-run bonds?
On-the-run Treasurys are the latest issues in a particular maturity. For example, all the notes sold in the most recent auction of 10-year notes would be the on-the-run 10-year issue. Any 10-year notes issued previously would become off-the-run.
When the financial press talks about Treasurys, it’s generally about on-the-run issues because they’re most in-demand and frequently traded.
So they’re often more expensive than off-the-run issues, even if the coupon and maturity are almost identical. This makes off-the-run issues a potential bargain.
What is a US Treasury bond auction?
The US Treasury sells its bonds, notes, and bills through public auctions in which individuals can participate by making non-competitive bids. You can buy directly by enrolling in a TreasuryDirect program or through a broker or bank.
As an auction takes place, the Treasury accepts competitive bids, starting with the lowest rate that’s bid and gradually accepting higher bids until the quota for that auction is filled. That rate becomes the auction rate. All the competitive bidders who bid rates lower than the cut-off bid have their orders filled at the auction rate, as do all non-competitive bidders. However, institutions that bid the cut-off rate may not be able to invest as much as they would like if the quota is already filled.
Treasury bills are auctioned every week. The 2-, 3-, 5-, and 7-year notes and FRNs are auctioned once a month, the 10-year notes eight times a year, and 30-year bonds four times a year. The frequency of those auctions changes from time to time, depending on the government’s need for cash. You can get current auction information by visiting the TreasuryDirect website.
Like other debt securities, Treasurys can be traded in the secondary market after the issue, and their prices fluctuate to reflect changing demand. In the order of maturity date, details of those trades are reported regularly. The changing yield on 10-year notes and 30-year bonds are used as benchmarks for evaluating the current state of the securities markets and the economy as a whole.
Why invest in Treasury securities?
Of course, the fact that Treasury securities are unconditionally backed by the full faith and credit of the United States government is their most significant advantage. Treasury security interest is subject to federal taxation but is free from state and local taxes. However, investors who purchase Treasury bonds and notes at a discount may be charged for capital gains taxes if they sell the securities or redeem them later.
Individual investors may use a laddering strategy when investing in Treasury issues or other fixed-income products. The goals of laddering include:
- Providing regular return of principal that is available to reinvest or supplement income
- Avoiding the potential problem of having to reinvest the entire principal of a fixed-income portfolio at one time, especially if rates are low.
When you ladder, you split the investment principal you’ve allocated to fixed income into equal amounts and invest each portion in a debt security that differs from the others you’re buying by the maturity date. So, for example, you might put $5,000 into 52-week Treasury bills that mature in June 2016, $5,000 into 2-year US notes that mature in June 2017, and $5,000 into 3-year notes that mature in June 2018. Then, as an investment matured, you’d roll it over into new 3-year notes each year.
US Treasury Securities by Inna Rosputnia
Wishing you a great week!
Want Your Money To Grow?
Subscribe to get free research, trading lessons, and more insights.
(We do not share your data with anybody, and only use it for its intended purpose)
