Should I Buy Treasuries? What to Know Before Investing

U.S. Treasury securities are debt instruments issued by the United States Department of the Treasury. They are a direct method for the U.S. government to raise capital, funding public expenditures and operations. When you invest in a Treasury security, you are lending money to the federal government, helping the government manage its finances.

Understanding Treasury Securities

U.S. Treasury securities are considered one of the safest investments globally. They are backed by the “full faith and credit” of the U.S. government, an unconditional guarantee to meet payment obligations. The government’s ability to tax and print currency underpins this assurance, making the risk of default exceptionally low.

Treasuries are highly liquid, meaning they can be readily bought or sold without significantly impacting their price. A robust secondary market ensures investors can convert holdings into cash quickly. As fixed-income investments, Treasuries typically offer predictable returns, providing a stable component within an investment portfolio.

Types of Treasury Securities

The U.S. Department of the Treasury issues several types of marketable securities. Each is designed with distinct features to cater to different investor needs and time horizons. These variations primarily concern their maturity periods and how interest payments are structured.

Treasury Bills (T-Bills) are short-term debt instruments with maturities from a few days to 52 weeks. They do not pay periodic interest. Instead, they are sold at a discount to their face value, and investors receive the full face value at maturity, with the difference representing the return.

Treasury Notes (T-Notes) are medium-term investments, typically issued with maturities of 2, 3, 5, 7, or 10 years. Unlike T-Bills, T-Notes pay a fixed interest rate every six months until maturity. At maturity, the investor receives the principal amount.

Treasury Bonds (T-Bonds) are long-term investments, with maturities exceeding 10 years, most commonly 30 years. Similar to T-Notes, T-Bonds provide fixed interest payments semiannually throughout their term. At the end of the period, the principal amount is returned to the investor.

Treasury Inflation-Protected Securities (TIPS) protect investors from inflation. TIPS are issued with maturities of 5, 10, and 30 years and pay interest every six months based on a fixed rate. Their principal value adjusts semiannually according to changes in the Consumer Price Index (CPI), impacting both interest payments and the final principal repayment.

Floating Rate Notes (FRNs) are Treasury securities generally issued with a 2-year maturity. Interest payments on FRNs adjust periodically, typically quarterly, based on a benchmark rate. This allows interest income to fluctuate with prevailing market interest rates, offering investors a variable return.

Key Considerations for Treasury Investments

Before investing in Treasury securities, evaluate factors influencing their attractiveness and real return. The prevailing interest rate environment significantly impacts Treasury values and yields. Bond prices and interest rates share an inverse relationship: when interest rates rise, the market value of existing bonds with lower fixed rates tends to fall, and vice versa. Longer-maturity Treasuries are more sensitive to these fluctuations than shorter-term ones.

Inflation poses a risk to fixed-income investments, as it can diminish the purchasing power of future interest payments and the principal. While most Treasuries offer a fixed nominal return, Treasury Inflation-Protected Securities (TIPS) are designed to counteract this risk. The principal value of TIPS adjusts with inflation, helping to preserve the investor’s real return over time.

The tax treatment of interest income from Treasury securities is an important consideration. Interest earned is subject to federal income tax. However, it is generally exempt from state and local income taxes, which can benefit investors in high-tax states. If Treasuries are sold before maturity, investors may realize capital gains or losses, subject to tax rules.

Purchasing Treasury Securities

U.S. Treasury securities can be acquired through TreasuryDirect or a brokerage account. TreasuryDirect allows individual investors to establish an online account. This process typically involves personal identification and bank account information.

Once an account is set up, investors can participate in Treasury auctions for new issues. The non-competitive bidding option is popular for individual investors, ensuring they receive the security at the average price without needing to specify a yield. Payments are typically debited directly from a linked bank account.

Alternatively, investors can purchase Treasury securities through a brokerage account. Most major brokerage firms offer access to both newly issued Treasuries and those available in the secondary market. This method provides convenience for investors who already manage other investments through a brokerage, allowing for a consolidated portfolio view. Brokerage firms may charge commissions or fees for these transactions.