Breaking Down U.S. Treasuries Investments
The market for U.S. Treasury securities is one of the most important in the world. What types of investments make up this collection? Read on to understand more about U.S. Treasury securities.
What are U.S. Treasury securities?
U.S. Treasury securities are government debt issued by the U.S. Department of the Treasury to finance the national debt. There are a number of different types of Treasuries; some are actively traded — such as bills, notes and bonds, and others are issued directly to subscribers — such as savings bonds. By purchasing a Treasury security, you are lending the federal government money for an agreed-upon amount of time.
What makes this investment "risk free?"
Since the U.S. government is the issuer, the market considers Treasuries to be essentially “risk free,” which generally means that investors receive the interest and their initial investment in full and on time.
Aside from their “risk-free” nature, the market for Treasury Bills, Notes and Bonds is very liquid, meaning that trading is fast and efficient, with many ready buyers and sellers. This creates low transaction costs and an easy way to find the best price for both buyers and sellers.
Because of their unique degree of safety, Treasuries bring in a lower amount of interest when compared to other securities such as corporate bonds. The price of Treasuries is influenced by many factors including economic conditions, interest rates, inflationary expectations and even political events in both the U.S. and abroad. As with all types of fixed interest securities, when interest rates fall, bond prices rise, and vice versa.
Additionally, the rates of Treasury securities are the benchmark for which all other credit is priced throughout the economy.
What is unique about this investment?
The biggest virtue is its level of safety and predictability.
The lack of a “call provision” — meaning that the issuer (in this case, the federal government) cannot pay off the whole bond before it has matured — strengthens its predictability. In cases where this is common, such as municipal and corporate bonds, if interest rates are falling an issuer could refinance the existing higher interest rate paying debt in order to pay a lower interest rate. This is not unlike an individual refinancing the mortgage on his or her house to take advantage of a lower interest rate.
What are the different types of Treasury securities?
Treasury securities come in many different forms and with varying timelines of maturity. Read on to better understand how some of the most common types work.
- Treasury Bills: These short-term securities mature in no longer than one year and can be used to hold money that investors need to access quickly. Investors buy a bill at a discount from the face value and then receive the entire amount once it matures.
- Treasury Notes:These medium- to long-term investments are normally issued in two, three, five, seven and ten year categories. Interest is paid semiannually.
- Treasury Bonds:These securities cover periods of time lasting longer than 10 years and mature in around 30 years. Interest is paid semiannually.
- U.S. Savings Bonds:In general, investors may buy $10,000 in bonds per year and can redeem the securities at any point after one year (with penalties). After five years, there is no penalty for redemption.
- Treasury Inflation Protected Securities (TIPS):TIPS carry interest rates that are indexed to the consumer price index in order to protect investors from inflation. Interest on TIPS is paid semiannually.
- Floating Rate Notes:The Treasury began issuing FRNs in January 2014. Issued for a term of two years, FRNs pay varying amounts of interest quarterly until maturity. Interest payments rise and fall based on discount rates in auctions of 13-week Treasury bills.