What Is a Treasury Security? Treasury Bonds, Bills, and Notes

By Laurel Tincher · May 18, 2024 · 11 minute read

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What Is a Treasury Security? Treasury Bonds, Bills, and Notes

Treasury securities are like the rock-solid foundation of the financial world. In essence, they are IOUs that the U.S. government offers to investors in order to borrow money. There are various types, each with unique characteristics, including Treasury bonds, bills, and notes.

Since they are seen as extremely safe investments, those seeking financial stability frequently choose them. Let’s examine Treasury securities in more detail and see why they are important.

Key Points

•   Treasury securities are government-issued debt obligations that include bonds, bills, and notes, offering a safe investment option.

•   Treasury bonds are long-term investments with maturities over ten years, providing semi-annual interest payments.

•   Treasury notes are medium-term securities that offer maturities between two and ten years, also paying interest semi-annually.

•   Treasury bills are short-term securities sold at a discount and mature within one year without periodic interest payments.

•   The 10-year Treasury yield serves as a benchmark for various economic rates, reflecting broader economic conditions and investor sentiment.

What Are Treasury Securities?

In essence, Treasury securities are loans made by investors to the United States government. Treasury bonds, Treasury bills, and Treasury notes are the three primary varieties. Purchasing one of these securities is equivalent to making a fixed-term loan to the government that may last anywhere from a few days to thirty years.

The government agrees to reimburse you for your initial investment (the principal) plus interest in exchange. The Treasury yield, which is this interest rate, is used as a standard by which other interest rates in the economy are measured. Because they are backed by the full faith and credit of the United States government, Treasury securities are typically considered to be among the safest investments available.

What Are Treasury Bonds?

The United States government issues Treasury bonds, which are long-term debt instruments with maturities of ten years or longer. Purchasing a Treasury bond is akin to making a fixed-term loan to the government, typically for a duration of 20 or 30 years. In exchange, you get interest payments from the government every six months until the bond matures, at which time you are paid the bond’s whole face value.

Since the U.S. government backs Treasury bonds with its full faith and credit, they are among the safest investments available. Additionally, they are quite liquid, making it simple to buy and sell them on the open market. Investors looking for a dependable means of capital preservation and a consistent income source frequently utilize Treasury bonds.

Difference from US Savings Bonds

The U.S. government issues both Treasury bonds and U.S. Savings Bonds, but there are a few significant distinctions between the two.

U.S. Savings Bonds normally have shorter periods, typically between 20 and 30 years, while Treasury bonds typically have longer maturities, ranging from 10 to 30 years. Interest on Treasury bonds is paid semi-annually, whereas interest on U.S. Savings Bonds is paid monthly and compounded semi-annually.

Another difference is that U.S. Savings Bonds are offered at a discount to face value and earn a fixed rate of interest over time, whereas Treasury bonds are sold at face value and pay a fixed interest rate.

While U.S. Savings Bonds are frequently bought by individuals as a means of saving for short- or medium-term financial goals, such as retirement or schooling expenses, Treasury bonds are typically purchased by institutional investors and individuals seeking long-term investment possibilities. Both kinds of bonds are offered by the U.S. government and are low-risk investment options, but they have different uses and meet various demands from investors.

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What Are Treasury Notes?

The United States government issues medium-term debt securities called Treasury notes, which have maturities of two to ten years. Essentially, investors who buy Treasury notes are making a fixed-term loan to the government. Until the note matures and the investor obtains the full face value of the note, the government pays them interest every six months in exchange.

Since they are backed by the full faith and credit of the United States government, Treasury notes are thought to be less risky than many other investment options. Investors seeking a compromise between the short-term flexibility of Treasury bills and the long-term stability of Treasury bonds frequently choose them.

In addition to the ease of buying and selling on the open market, Treasury notes are extremely liquid, which makes them a preferred option for investors looking to combine flexibility and security in their investment portfolios.

The Significance of the 10-year Treasury Yield

In the financial world, the 10-year Treasury yield is very important since it is a key benchmark for other interest rates throughout the economy. The yield on a 10-year Treasury bond is the annual return that an investor can expect. As such, it reflects investor sentiment regarding future economic conditions, inflation expectations, and monetary policy outlook.

Variations in the yield on the 10-year Treasury note have the potential to impact not only corporate borrowing rates but also mortgage rates, vehicle loan rates, and consumer borrowing costs.

Additionally, it has an impact on the value of other financial assets since investors weigh their future returns against the comparatively safe yields of Treasury securities when valuing stocks and bonds. As a crucial indicator of general market mood and economic conditions, central banks and policymakers regularly monitor movements in the 10-year Treasury yield to assess the state of the economy and modify monetary policies accordingly.

What Are Treasury Bills?

The U.S. government issues Treasury bills, sometimes known as T-bills, which are short-term debt securities with maturities of one year or less.

In essence, investors who buy Treasury bills are making a short-term loan to the government. Treasury bills don’t pay interest on a regular basis like Treasury bonds and notes do. Rather, they are offered to investors at a price below face value, with the entire face amount due upon the bill’s maturity.

Since they are guaranteed by the full faith and credit of the United States government, Treasury bills tend to be considered some of the least-risky investments on the market. Because of their high liquidity and minimal risk, investors frequently utilize them as a short-term cash management tool or as a means of preserving capital.

Treasury notes are an essential part of the economy since they act as a base for a variety of financial transactions and as a benchmark for short-term interest rates.

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Who Should Invest in Treasury Securities?

Investors can benefit from investing in Treasury securities because of their consistent yields and low relative risk. Treasury securities are attractive to people who value capital preservation over large returns, particularly those who are approaching retirement or want to protect their resources. Treasury securities are a popular choice among conservative investors and those with low risk tolerance.

To comply with regulations and reduce risk, institutional investors like banks, insurance firms, and pension funds also set aside a percentage of their portfolio allocation for Treasury securities. Treasury securities are crucial components of diverse investment portfolios and a key part of any investor’s financial plan who is looking for a dependable and safe choice.

Pros and Cons of Treasury Investments

There are both benefits and downsides to Treasury Investments:

Benefits of Treasury Investments

•   Low Relative Risk: Because they are backed by the full faith and credit of the United States government, Treasury securities tend to be less risky than other investment types.

•   Guaranteed Yield: They give investors a steady source of income with a guaranteed rate of return – or, as close to a guarantee as an investor is likely going to find.

•   Treasury securities are highly liquid, which allows investors flexibility as they can be quickly bought and sold on the secondary market.

Drawbacks of Treasury Investments

•   Low Yield: Treasury securities usually have lower yields when compared to alternative investment options like equities or corporate bonds.

•   Interest Rate Risk: Interest rate fluctuations can have an impact on Treasury securities. The value of current Treasury securities may decline if interest rates rise.

•   Inflation Risk: Although Treasury securities are generally low risk, they might not yield enough returns in the long run to beat inflation, which might reduce one’s purchasing power.

•   Market Risk: While unlikely, there’s a chance that shifts in investor sentiment or market disruptions could have an impact on the price of Treasury securities.

How Can You Invest in Treasuries?

Individuals can invest in Treasuries with relative ease and accessibility. Investors can buy Treasury securities straight from the U.S. Department of Treasury via website, TreasuryDirect.gov.

Investors can also purchase them via a financial institution, bank, or broker. Mutual funds and exchange-traded funds (ETFs) that contain Treasury securities in their portfolios are another way for people to indirectly invest in Treasury securities.

Through TreasuryDirect.gov

Bonds, bills, and notes issued by the U.S. government can be directly purchased by individuals by using TreasuryDirect.gov. Without going via a broker or other financial middleman, investors can purchase, manage, and redeem Treasury securities using this online platform.

Treasury auctions, in which the public is offered newly issued securities, can be attended by investors via TreasuryDirect.gov. Investors can enter these auctions with competitive or non-competitive bids to buy Treasury securities at fixed yields or interest rates.

Non-competitive bids accept the yield that is decided by the auction, whereas competitive bids indicate the desired yield. Investors can interact directly with the U.S. Treasury Department to purchase Treasury assets through an open and easily accessible process, giving them more power over their financial choices.

Through a Broker or Bank

An additional way for investors to obtain these assets is by buying Treasury securities through a bank or broker. Treasury securities can be purchased and held alongside other financial products by investors through the investment services provided by numerous banks and brokerage firms. Financial experts can assist in customizing investing plans to meet the specific needs and objectives of each investor.

Purchasing through a bank or broker may provide access to a greater selection of investment options, including Treasury bills, notes, and bonds with different maturities and yields. Although there can be commissions or transaction costs associated with this approach, investors benefit from the ease of having all of their investment accounts combined into one location.

Purchasing Treasury securities via a bank or broker provides investors with ease, flexibility, and individualized assistance in creating a diverse investment portfolio.

ETFs and Mutual Funds

Investors can buy Treasury Securities in a convenient way through ETFs and mutual funds that hold bonds, bills, and notes. Investors can benefit from professional management and experience choosing and overseeing Treasury securities within the fund’s portfolio by making an investment in these funds.

Mutual funds and ETFs provide liquidity, enabling investors to buy and sell shares on the open market at any time. Investors can easily modify their exposure to Treasury securities in response to shifting market conditions or investing goals.

Mutual funds and ETFs often have lower expense ratios than actively managed funds, so investing in Treasury securities using this method can be an affordable way to access a diverse portfolio of Treasury securities.

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How Are Treasury Bonds, Bill, and Notes Taxed?

Since they are subject to unique tax laws, investors looking for tax-efficient investment options may find Treasury bonds, bills, and notes appealing. State and local income taxes are not applicable to interest income collected on Treasury securities, but it is subject to federal income tax.

Taxation applies to any capital gains upon the selling of Treasury securities. An investor will have a capital gain that is liable to capital gains tax if they sell a Treasury asset for more money than they paid for it.

On the other hand, the investor can experience a capital loss if they sell the investment for less than what they paid for it. This loss can be applied to offset capital gains and lower their taxable income.

What Are Other Types of Treasury Securities?

The U.S. Treasury offers a variety of securities in addition to Treasury bonds, bills, and notes. By basing the principal value of Treasury Inflation-Protected Securities (TIPS) on fluctuations in the Consumer Price Index (CPI), TIPS offer protection against inflation.

By guaranteeing a rate of return, this helps investors maintain their purchasing power over time. Investors are protected against interest rate risk by Floating Rate Notes (FRNs), which have variable interest rates that fluctuate based on changes in market interest rates.

The U.S. Treasury issues savings bonds such as Series I and Series EE that provide people with a convenient and secure long-term means of saving money. Series EE Savings Bonds pay a set rate of interest for a maximum of 30 years, while Series I Savings Bonds protect against inflation.

The Takeaway

Treasury securities give investors a range of choices to achieve their financial objectives, including long-term savings, inflation protection, and income generation. In the ever-changing world of financial markets, investors can protect capital, reduce risk, and reach their goals through Treasury bonds, bills, notes, and other securities like TIPS and savings bonds.

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What is the meaning of Treasury Security?

The U.S. Department of the Treasury issues debt obligations known as Treasury securities, which include Treasury bills, notes, and bonds. Because they are backed by the full faith and credit of the United States government, Treasury securities are among the safest investments.

What is an example of Treasury securities?

Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRNs) are the five categories of marketable securities offered by the U.S. Treasury.

Are Treasury securities risky?

Because the U.S. government completely backs Treasury bonds, there is very little chance that they would default, making them a popular choice for investors looking to avoid risk. Investors need to be aware that interest rate risk exists even with U.S. government bonds.

Photo credit: iStock/Andrii Yalanskyi

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