Stocks

Treasury Bond Overview of U S Backed Debt Securities

Treasury Bond Overview of U S Backed Debt Securities

Treasury Bond: Overview of U.S. Backed Debt Securities

What Is a Treasury Bond (T-Bond)?

Treasury bonds (T-bonds) are government debt securities issued by the U.S. Federal government with maturities of 20 or 30 years. T-bonds earn periodic interest until maturity, at which point the owner is paid a par amount equal to the principal.

Treasury bonds are part of U.S. sovereign debt known collectively as Treasuries, which are typically regarded as virtually risk-free since they are backed by the U.S. government’s ability to tax its citizens.

Key Takeaways

  • Treasury bonds (T-bonds) are fixed-rate U.S. government debt securities with maturities of 20 or 30 years.
  • T-bonds pay semiannual interest until maturity, at which point the face value of the bond is paid to the owner.
  • Along with Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities (TIPS), Treasury bonds are virtually risk-free government-issued securities.

Understanding Treasury Bonds (T-Bonds)

Treasury bonds (T-bonds) are one of four types of debt issued by the U.S. Department of the Treasury to finance the U.S. government’s spending activities. The four types of debt are Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS). These securities vary by maturity and coupon payments.

READ MORE  What Is a Bear in Investing How Bears Trade Pros and Cons

T-bonds are considered benchmarks to comparable fixed-income categories because they are virtually risk-free. T-bonds are backed by the U.S. government, and the U.S. government can raise taxes and increase revenue to ensure full payments.

These investments are also considered benchmarks in their respective fixed-income categories because they offer a base risk-free rate of investment with the lowest return. T-bonds have long durations, with maturities of 20 and 30 years.

As is true for other government bonds, T-bonds make interest payments semiannually, and the income received is only taxed at the federal level. Treasury bonds are issued at monthly online auctions held by the U.S. Treasury. A bond’s price and yield are determined during the auction. After that, T-bonds are traded actively in the secondary market and can be purchased through a bank or broker.

Individual investors often use T-bonds to keep a portion of their retirement savings risk-free, provide a steady income in retirement, or save for a child’s education or other major expenses. Investors must hold their T-bonds for a minimum of 45 days before selling them on the secondary market.

Treasury Bond Considerations

Treasury Bond Maturity Ranges

Treasury bonds have maturities of 20 or 30 years. They are issued with a minimum denomination of $100, and coupon payments are made semiannually. The bonds are initially sold through an auction; the maximum purchase amount is $5 million for non-competitive bids (or 35% of the offering for competitive bids).

A competitive bid states the rate the bidder is willing to accept. A non-competitive bid ensures the bidder gets the bond but must accept the set rate. After the auction, the bonds can be sold in the secondary market.

READ MORE  Maintenance Bond What it Means How it Works

The Treasury Bond Secondary Market

There is an active secondary market for T-bonds, making the investments highly liquid. The secondary market also causes T-bond prices to fluctuate considerably. Current auction and yield rates of T-bonds dictate their pricing levels on the secondary market.

Similar to other bonds, T-bond prices decrease when auction rates increase, and the value of the bond’s future cash flows is discounted at a higher rate. Conversely, when prices increase, auction rate yields decrease.

Treasury Bond Yields

In the fixed-income market, T-bond yields help form the yield curve, which includes the full range of investments offered by the U.S. government. The yield curve diagrams yield by maturity, and it is most often upward-sloping (with lower maturities offering lower rates than longer-dated maturities). However, the yield curve can become inverted when long-term rates are lower than short-term rates, signaling an upcoming recession.

What Are the Types of Treasuries?

There are three main types of U.S. Treasuries: bonds, notes, and bills. Bills mature in less than a year, notes in two to five years, and bonds in 20 or 30 years. All are backed by the full faith of the U.S. government.

How Do You Buy T-Bonds?

To buy T-bonds, you can go to Treasurydirect.gov, create an account, and purchase your bonds directly from the government on the website.

Are Treasury Bonds a Good Investment?

Whether Treasury bonds are a good investment depends on the specific investor. Treasury bonds are considered risk-free assets, so investors with a low risk tolerance would find these assets suitable. However, because they are safe, they pay a low interest rate, limiting returns. They can be good options in a declining equities market for some investors. Additionally, though they are risk-free, Treasury bonds are susceptible to inflation risk and interest-rate risk, which could reduce returns for an investor.

READ MORE  Transatlantic Trade and Investment Partnership TTIP Overview

The Bottom Line

Treasury bonds are part of the collective of U.S. Treasuries. They are low-risk assets that investors can choose when looking for safe but low returns. You can invest in Treasury bonds through exchange traded funds (ETFs) and mutual funds. The gilt is the United Kingdom’s version of this security and also trades through gilt funds.

Treasury bonds are also a good option for investors seeking a haven from volatile equity markets. Because Treasury bonds are backed by the full faith of the U.S. government, which has the largest and most stable economy in the world, they are considered risk-free investments.

Leave a Reply

Your email address will not be published. Required fields are marked *