The Safety of Treasury Securities: A Conservative Investment Option

Regarding conservative investments, nothing offers more safety than U.S. Treasury securities. These instruments have long been considered a bastion of safety, serving as a reliable way to preserve capital, even during turbulent market times. Investors regard them as one of the most secure investments because the full faith and credit of the U.S. government backs them.

With the U.S. government’s backing, Treasury securities play a pivotal role in the U.S. economy and the global financial system. Their safety and reliability make them attractive to both individual and institutional investors, cementing their status as a critical cornerstone.

Key Takeaways

• Treasury securities are considered one of the safest investment options as the U.S. government guarantees them.
• They are divided into three main types based on maturity: Treasury Bills (T-Bills), Treasury Bonds (T-Bonds), and Treasury Notes (T-Notes).
• Investors can buy Treasury securities directly from the U.S. government via TreasuryDirect.gov or through banks and brokers.
• While low-risk, Treasury securities are not without risks, such as inflation and interest rate changes.
• Because they are low-risk, Treasury securities tend to have lower yields than other investment options.
• The interest from Treasury securities is taxable at the federal level.

Essential Characteristics of Treasury Securities

The length of their maturities categorizes Treasury securities. While they share some common characteristics, they also differ in critical ways. These securities are available in three main types:

Treasury Bills (T-Bills)

T-Bills have the shortest maturities of all Treasury securities, ranging from four weeks to 52 weeks. The government auctions T-Bills regularly, with maturities available for four weeks, eight weeks, 13 weeks, 26 weeks, and 52 weeks. There is also a less common type called the cash management bill, issued for short-term borrowing needs with variable terms, typically only lasting a few days.

One unique aspect of T-Bills is that they can be found in both the capital and money markets because some maturities are under 270 days, which is the dividing line between them. Investors buy T-Bills at a discount to their face value, and when the bill matures, it pays out at par value. The difference between the discounted purchase price and the face value is the interest earned by the investor.

Treasury Notes (T-Notes)

Treasury Notes fall in the middle range of maturity, with terms of two, three, five, seven, and ten years. The Treasury auctions two-year, three-year, five-year, and seven-year notes monthly, while the 10-year note is auctioned quarterly (February, May, August, and November), with reopenings in the other months. Like T-Bills, T-Notes are issued with a $100 face value, and investors are paid interest semiannually.

Treasury Bonds (T-Bonds)

Often referred to as the “long bond,” T-Bonds are the longest-term Treasury security, with a maturity of 30 years. T-Bonds are similar to T-Notes but have a longer term. They are issued, mature at $100 face value, and pay interest semiannually. The Treasury auctions new T-Bonds in February, May, August, and November, with reopenings in other months.

Purchasing Treasury Securities at Auction

Investors can acquire Treasury securities at auction through TreasuryDirect, typically in $100 increments. However, not all maturities are available at every auction. For instance, T-Notes with maturities of two, three, five, and seven years are auctioned monthly, while the 10-year note is only offered quarterly.

T-Bills with all maturities are auctioned weekly, except for the 52-week bill, which is auctioned monthly. Investors who wish to automate their investments can use the TreasuryDirect Payroll Savings Plan, which allows them to defer a portion of their paycheck to a TreasuryDirect account, where they can purchase securities electronically.

Taxpayers can also direct their federal tax refunds into a TreasuryDirect account for the same purpose. It’s important to note that paper certificates for Treasury securities are no longer issued; all transactions are now handled electronically via a book-entry system.

Risks and Rewards of Treasury Securities

The most significant advantage of Treasury securities is that the U.S. government backs them. This guarantee means that, as long as the investor holds them to maturity, they are guaranteed both the principal and the interest due. However, despite this security, Treasury securities are only partially risk-free.

Treasury securities are vulnerable to inflation and interest rate changes. While their principal is guaranteed, inflation can erode the purchasing power of the interest and principal payments. Furthermore, because Treasury securities are considered highly safe, they offer lower interest rates than other bonds or fixed-income securities.

Due to its longer maturity, the 30-year T-Bond pays a higher rate of interest, making it competitive with shorter-term offerings. Unlike corporate or municipal bonds, Treasury securities no longer have call features, which allow issuers to buy back bonds before maturity and reissue them at a lower interest rate.

Treasury securities are also traded in the secondary market, where their prices fluctuate based on interest rate movements. When interest rates drop, bond prices rise, and vice versa. Investors who purchase Treasury securities in the secondary market will continue to receive the remaining interest payments and the face value at maturity regardless of what they paid for the bond.

Tax Treatment of Treasury Securities

The interest earned on Treasury securities is fully taxable at the federal level but exempt from state and local taxes. This makes Treasury securities attractive to investors in states with high-income tax rates. The difference between the purchase price and the face value of T-Bills is also classified as interest for tax purposes.

Suppose an investor sells a Treasury security in the secondary market. Any profits or losses are capital gains or losses, which must be reported accordingly. Each year, the Treasury Department sends investors Form 1099-INT, which details the taxable interest that needs to be reported on their tax return.

Who Invests in Treasury Securities?

It’s not just individuals and institutions that find value in Treasury securities. Estates, trusts, and corporations also see the appeal. The diverse range of investors, each with their unique objectives, underscores the broad appeal and utility of Treasury securities.

Foreign governments also invest heavily in U.S. Treasury securities. Countries like Japan, China, the United Kingdom, Brazil, and Ireland are some of the largest holders of U.S. debt. Treasury securities offer a safe place for these nations to park their forex reserves.

Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities, or TIPS, help investors hedge against inflation. The principal value of these securities adjusts with inflation, ensuring that investors maintain purchasing power as prices rise. As inflation increases, the principal amount of the TIPS also increases, protecting the declining value of money.

Different Types of Treasury Securities

The U.S. government offers other types of Treasury securities, including T-Bills, T-Notes, and T-Bonds. These include TIPS, Floating Rate Notes (FRNs), Series I Savings Bonds, and Series EE Savings Bonds. Each offers different features to meet various investor needs.

How to Purchase Treasury Securities

The easiest way to buy Treasury securities is through the government’s official website, TreasuryDirect.gov. Investors can also purchase these securities through banks and brokers.

The Bottom Line

Treasury securities play a critical role in domestic and international bond markets. For more information, investors can visit TreasuryDirect.gov, where they can find detailed information on T-Bills, T-Notes, T-Bonds, and other Treasury securities. This website also offers a comprehensive auction schedule, access to records of bonds, and other valuable resources for investors.