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What is a Treasury bond?

Treasury securities are a low-risk option for your portfolio

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As part of investing, it is important to properly manage your risk. Treasury bonds, also referred to as T-bonds, are a good option for those looking to mitigate or hedge against market risk while earning steady income.

Key insights

  • Treasurys are backed by the full faith and credit of the U.S. government, making them one of the safest investment options available.
  • T-bonds are issued in 20- and 30-year durations, while T-notes and T-bills range from four weeks to 10 years.
  • As with most fixed-income investments, the market value of T-bonds is susceptible to interest rate fluctuations.

How Treasury bonds work

T-bonds and all other Treasurys are debt obligations issued and backed by the U.S. federal government. The government sells Treasurys to raise money, so it may be helpful to think of Treasurys as loans from citizens to the government.

They are offered in 20- and 30-year lengths, and are initially sold in Treasury auctions. These auctions take place four times a year, and only after the auction do T-bonds hit the secondary market. T-bonds bought directly from the Treasury are issued in increments of $100. Brokers may have a higher minimum buy, such as $1,000 or $10,000.

As with other bonds, T-bonds pay interest, making them attractive options for income investors. The interest is paid out semiannually, and the exact interest rate offered depends on a number of factors, including inflation, economic uncertainty and the interest rate set by the Federal Reserve. This means that a 20-year T-bond issued in one auction may have a different interest rate than one issued at the next.

When a T-bond matures, you can redeem it through either the TreasuryDirect website or from the institution you bought it from. Upon redemption, you will receive the face value of the bond.

T-bonds vs. T-bills vs. T-notes vs. TIPS

T-bonds are not the only type of debt instruments issued by the U.S. government. Other Treasurys include Treasury bills and notes, referred to as T-bills and T-notes, respectively. There is also a type that offers protection against inflation, called the Treasury Inflation-Protected Security, or TIPS.

  • T-bonds: These generally have the highest interest rate, and are offered in durations of 20 and 30 years.
  • T-notes: These are offered as a midpoint between T-bonds and T-bills, in durations ranging from two to 10 years.
  • T-bills: These are offered in durations between four weeks and one year, with generally the lowest interest rate. Unlike T-bonds and T-notes, T-bills do not make interest payments semiannually. Instead, these securities are bought at a discount to par value — meaning the bonds trade at a value less than face value, and upon maturity the investor receives the face value of the Treasury.
  • TIPS: Offered in maturities of five, 10 and 30 years, these Treasury securities are a useful way to hedge against high inflation. The principal value (also known as the face or par value) increases in an inflationary environment and decreases in a deflationary environment. As with T-bonds and T-notes, these securities make interest payments semiannually.

Interest rate fluctuations have an inverse relationship with Treasurys and other fixed-income investments. As interest rates rise, the value of a Treasury increases, and vice versa when interest rates fall.

Because of this, the general yield curve of Treasury bonds is upward sloping — meaning that Treasurys with longer durations have higher interest rates than Treasurys with shorter durations.

An inverted yield curve, in which Treasurys of shorter durations have higher interest rates than Treasurys of longer durations, is relatively rare and may prelude a recession.

» MORE: Interest rates and how they work

Pros and cons of Treasury bonds

As with any investment, there are pros and cons to adding T-bonds to your portfolio.

The pros of adding T-bonds include:
  • Low risk: “Treasurys are considered the safest investment on the planet because they are backed by the full faith and credit of the United States government,” said Marc Lichtenfeld, chief income strategist of The Oxford Club. Dennis O’Keefe, of Successful Money Management Strategies, agreed: “They are some of the most secure investments in the world.”
  • Tax advantages: “There are no state and local taxes due on the interest you earn,” said Jeremy Keil, of Keil Financial Partners. However, federal tax still applies.
  • Liquidity: “The secondary market for Treasury securities is gigantic,” said O’Keefe. “It is very easy to sell (or buy) a Treasury security prior to maturity should you need to cash the bond in.”
The cons of T-bonds include:
  • Interest rate risk: “While they are free from default risk, Treasurys are not free from price risk,” said Robert Johnson, a professor of finance at Creighton University. “As market interest rates rise, the market value of Treasury bills, notes and bonds fall.”
  • Lower yield than high-risk investments: Compared with potential returns offered by stocks, T-bonds have a significantly reduced yield.
  • Tax disadvantage if sold early: If you do not plan on holding the T-bond until maturity and instead sell it on the secondary market, you’ll have a capital gain and could owe additional taxes.

How to buy Treasury bonds

The most common way to buy T-bonds is via the TreasuryDirect website. You need to make an account, which will involve many of the same steps as opening a brokerage account; proof of your identity and a source of funds will be the most commonly required documents.

You can also buy T-bonds directly from a broker or financial institution, though doing so may incur additional fees not found in purchases made through the Treasury site.

If you are confused about how bond yields and values are calculated, you also have access to indirect investment options such as exchange-traded funds (ETFs) that hold T-bonds.

“Understanding yield to maturity (YTM) can be difficult even for professional investors,” said Ryan Glover, the chief investment officer at Tarheel Advisors, LLC. “So if that is the case for someone, then purchasing a Treasury money market fund or short-term Treasury ETF could be a better choice.”

» MORE: Best online stock brokers for beginners

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Are Treasury bonds the same as U.S. savings bonds?

No, T-bonds are not the same as U.S. savings bonds. While a U.S. savings bond is also issued by the federal government and accrues interest, it cannot be bought and sold in the secondary market and has a maximum purchase value of $10,000 per year.

Do you pay tax on Treasury bonds?

The interest income you receive from T-bonds is exempt from state and local taxes. However, they are still subject to federal taxes.

How often do Treasury bonds pay interest?

T-bonds pay interest semiannually, or twice a year.

Are Treasury bonds a good investment?

For investors looking for a relatively risk-free investment that will help them generate income, Treasury bonds are a great option. However, for those looking to grow their capital, T-bonds are not a suitable recommendation.

Bottom line

T-bonds can be a useful way to earn interest income in a relatively risk-free environment. While there are drawbacks, most notably risks pertaining to interest rate fluctuations and diminished returns, they’re well-suited to anyone seeking a safe investment with relative stability.

It’s important to understand your own risks and goals so that you can make the investment decision that is best for you.

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. U.S. Department of the Treasury, “Treasury Bonds.” Accessed March 21, 2023.
  2. U.S. Department of the Treasury, “Buying a Treasury Marketable Security.” Accessed April 19, 2023.
  3. U.S. Department of the Treasury, “Treasury Notes.” Accessed April 19, 2023.
  4. U.S. Department of the Treasury, “Treasury Bills: FAQs.” Accessed April 19, 2023.
  5. U.S. Department of the Treasury, “Treasury Inflation Protected Securities (TIPS).” Accessed April 19, 2023.
  6. U.S. Department of the Treasury, “Tax Forms and Tax Withholding.” Accessed April 19, 2023.
  7. Intuit, “Guide to Investment Bonds and Taxes.” Accessed April 19, 2023.
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