Introductory guide to US Treasury securities

When looking for low-risk investments, nothing shouts safe like US Treasury securities. Find out why investors are not afraid to invest in them by exploring the meaning of Treasuries, their types, pros, and cons.

Basic characteristics of Treasury securities

To supplement the funds collected by taxation to finance its expenditure, the government of the United States issues Treasury securities. Because all securities issued by the Treasury are backed by the “full faith and credit” of the government of the United States, these securities have come to be regarded as one of the fundamental cornerstones of the international and domestic economy. Come what may – war, inflation, recession – the US government is bound to take care of its security holders, making these securities attractive to individual and institutional investors.

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Treasury securities can be divided into three types according to the time periods they take to mature. Even though these three types of bonds share common characteristics, they also have some differences, giving each of them its unique pros and cons.  

The three main types of Treasury securities are T-Bills, T-Notes, and T-Bonds.

T-Bills

The government bonds with the shortest maturity range are the Treasury bills, also called T-Bills. Among the types of T-bills, there are five terms to maturity: four weeks, eight weeks, 13 weeks, 26 weeks, and 52 weeks. Another kind of bill, the cash management bill, is issued with variable terms, usually of a few days. However, these bills are not regularly auctioned. 

T-bills are the only kind of US Treasury security bonds found in the money and capital markets. It is because the term to maturity of some types of treasury bills falls within the 270-day dividing line, while others fall above it. 

T-Bills are sold at a discounted price and mature at par value. The difference between the sale and purchase price is the interest/profit made on the bill.

T-Notes

T-Notes are the middle-range terms of maturities among the Treasury securities. Currently, terms of two, three, five, seven, and ten years are being issued by the Treasury. Two-year, three-year, five-year, and seven-year notes are auctioned monthly, while original issue 10-year notes are available only in February, May, August, and November. For the remaining eight months, only reopenings are auctioned. 

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T-Notes are issued at a par value of $100 and mature at the same amount. In contrast to T-bills, the owners of T-Notes make a profit from the interest paid out semiannually to them.

T-Bonds

The investment community commonly refers to T-Bonds as the “long bond”. They get this name because their term to maturity is 30 years. Such a 30-year bond would pay a higher rate than other securities offer because of its longer maturity term. Other than this, they are fundamentally identical to T-Notes: they are also issued and mature at par value while paying interest semiannually. 

These bonds are auctioned every month by the Treasury. However, the original issue is auctioned only in February, May, August, and November, while reopenings are made available during the remaining eight months. 

Auction purchase of Treasury securities

Treasury securities are no longer issued using paper certificates. Instead, information about all purchases and holdings is recorded in a digital book-entry system. All three kinds of Treasury securities discussed above can be bought online from TreasuryDirect during an auction. They can be purchased in $100 increments. However, not every maturity term for each kind of security is made available at every auction. 

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Some securities, such as the 10-year T-Note, are only auctioned quarterly, while the two, three, five, and seven-year term T-Notes are available at every monthly auction. T-Bills of all term lengths are offered weekly except for the 52-week maturity, which is available once a month. 

Employees looking to purchase Treasury securities can do so through the TreasuryDirect Payroll Savings Plan. This plan allows investors to automatically defer a part of their income into their TreasuryDirect account. The employee can then use these to finance the purchase of treasuries. US taxpayers can also choose to transfer their income tax refunds into their TreasuryDirect account to finance the purchase of treasuries.

Risk and reward of Treasury Securities

Undoubtedly, the single greatest advantage of securities issued by the Treasury is that they are backed unconditionally by the full credit and faith of the US government. Investors can rest assured that they are guaranteed the return of their principal and the interest they are due by simply holding onto them until maturity. The same can rarely be said about any other kind of investment. However, even the securities of the Treasury come with their disadvantages.

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Similar to all guaranteed financial instruments, these securities can be affected by both inflation and updates in interest rates. The interest rates offered by T-Bills and Notes are also one of the lowest of any kind of fixed-income security, typically only exceeding the rates given by cash accounts such as money market funds. This is understandable as it is well-known that lower risk comes with lower profit ratios.

Call features are frequently attached to a good number of corporate and municipal securities. They give bond issuers the ability to call back their securities after a given time period (such as five years) and issue new securities that pay a lower (or higher) interest rate. Since Treasury securities no longer come with attached call features, the security value is influenced by the current interest rates.

If interest rates increase after a US Treasury security bond is issued, investors will prefer to purchase the newer bonds issued because they would pay higher rates of interest. This would decrease the value of the older securities. Similarly, if interest rates were to fall, the value of the older (and higher-paying) bond would increase as it would be in higher demand. 

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Tax treatment of Treasury securities

All three types of Treasury securities are subject to the same tax rules. The interest received on T-bills, T-bonds, and T-notes is considered profit and is thus federally taxed. In the case of T-bills, the difference in the buying price and price at maturation is viewed as the profit.

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Investors who make profits or losses on Treasuries traded in the secondary markets must also report short- or long-term gains and losses accordingly. The Treasury Department annually sends investors Form 1099-INT, which specifies the taxable income that has to be reported on the 1040.1211.

Who buys Treasury securities?

The remarkably low risk of treasury securities means that they are used by virtually every kind of investor in the market. Every investor, from individuals to institutions, estates, trusts, corporations, and governments, uses Treasury securities for custom purposes. 

Investment funds also use Treasuries to satisfy certain objectives to meet their fiduciary requirements. Individual investors often purchase these securities because they can rest assured of being paid their principal and interest according to the promised schedule without fearing them being called prematurely. Profits made on treasuries are not subject to state tax, meaning investors residing in states with high-income tax rates can use treasuries to reduce payable tax.

Country governments can purchase Treasury securities to help them gain a percentage of US debt. Japan, China, Brazil, the UK, and Ireland are examples of some of the largest foreign government holders of US debt. Apart from this, countries can also buy these securities for special purposes. For example, these treasury securities bonds act as a haven for Chinese forex reserves.

What are Treasury inflation-protected securities?

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In 1997, the US Treasury began issuing special notes and bonds designed to protect the investment from the effects of inflation. These inflation-indexed securities came to be known as TIPS (Treasury Inflation-Protected Securities).

The principal is adjusted by considering inflation rates from the Consumer Price Index. Along with the usual fixed interest rate paid semi-annually on this adjusted principal, the investor also receives a higher, inflation-adjusted principal back.

What are the different kinds of Treasury securities available?

Investors can purchase several different offerings from the US Treasury. These include the various types of Treasury Bills, Bonds, and Notes, Floating Rate Notes (FRNs), Treasury Inflation-Protected Securities (TIPS), Series I Savings Bonds, and Series EE Savings Bonds.

How do you buy Treasury securities?

The best channel for purchasing Treasury securities is the government’s dedicated website, TreasuryDirect.gov

Alternatively, many Treasury securities are bought and sold in the secondary market, similar to other kinds of bonds. These trades can be made via brokers, retail money managers, banks, savings institutions, and investment managers. Investors purchasing these securities from the secondary market are still guaranteed to be paid the remaining interest on the bond along with its face value at maturity (which can differ from what they paid the seller for them).

The bottom line

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For decades treasuries have stood as a pillar of safety in the world of investment finance. And they don’t look like they will go anywhere for the foreseeable future.

To learn more about Treasury securities, visit www.treasurydirect.gov. This official website contains tools and information related to T-bonds, T-notes, and T-bills, such as complete auction schedules, ownership inquiries, information about matured bonds, and much more.

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