Treasury bonds are a cornerstone of safe investing, offering long-term stability and predictable returns. They're a reliable way to grow your savings and generate income, especially for retirement planning.
What are Treasury Bonds?
Treasury bonds (T-bonds) are a key type of Treasury security used to finance government operations. They come with maturities of 20 or 30 years.
Features of Treasury Bonds
Fixed-Interest Payments: Once you buy T-bonds, you receive a fixed-interest payment, known as the coupon, every six months. The coupon amount is a percentage of the bond's face value. For example, a $500 bond with a 5% coupon rate would pay $25 in interest each year.
Maturity Payment: At maturity, you receive the bond's face value.
Automatic Redemption: When you redeem bonds with a TreasuryDirect account at maturity, the proceeds are automatically deposited into the bank account on file.
Higher Interest Rates: Compared to Treasury notes and bills, Treasury bonds typically pay the highest interest rates because investors seek more compensation for the longer-term investment.
Price Fluctuations: The prices of Treasury bonds can fluctuate more than those of Treasury notes and bills when issued.
Redemption Options: You can hold your T-bond until maturity or sell it in the secondary market, though you must wait at least 45 days before selling. Selling before maturity may result in a loss if the sale price is lower than the purchase price.
Online Auctions: Treasury bonds are sold at monthly online auctions at TreasuryDirect, the U.S. Treasury's securities platform. They are sold in multiples of $100, with prices and yields determined during the auction. T-bonds are also traded in the secondary market and can be purchased from a bank or broker.
Investment Use: Retail investors often use T-bonds to keep part of their savings risk-free and to receive a steady income during retirement. Treasury bonds can also serve as savings for education or other major expenses. Both retail and institutional investors buy Treasury bonds to diversify their portfolios, as T-bonds are low-risk, reduce overall portfolio volatility, and provide a steady income stream.
What are Treasury Notes?
Treasury notes (T-notes) are a type of Treasury security used to fund the government, with maturities of two, three, five, seven, or ten years.
Features of Treasury Notes
Semi-Annual Interest Payments: Treasury notes pay interest every six months until they mature.
Lower Interest Rates: Typically, Treasury notes pay less interest than T-bonds due to their shorter maturities.
Yield Determination: The yield of Treasury notes is determined at auction.
Face Value Payment: Upon maturity, you receive the face value of the note.
Auction Sales: Treasury notes are auctioned by the U.S. Treasury and sold in $100 increments. The auction results can affect the price, making it less than, more than, or equal to the note's face value.
Redemption Options: You can redeem Treasury notes in the same way as Treasury bonds. They can be held until maturity or sold in the secondary market before they mature.
What are Treasury Bills?
Treasury bills (T-bills) are a type of Treasury security issued by the U.S. Department of the Treasury to fund government operations. They typically have maturities of four, eight, 13, 17, 26, and 52 weeks. T-bills are issued exclusively in electronic form, with no paper versions available.
Features of Treasury Bills
Zero-Coupon Bonds: Unlike Treasury bonds and notes, T-bills do not pay interest. They are known as zero-coupon bonds.
Discounted Auction Price: Treasury bills are auctioned to investors at a discount to their face value. Your return is the difference between the face value and the discounted price you initially paid.
Example Return: For example, if you buy a T-bill with a $1,000 face value for $950, you will be paid $1,000 at maturity. The $50 difference between the purchase price and the face value is considered the interest.
No Default Risk: Like Treasury bonds and notes, T-bills have no default risk since they are backed by the U.S. government.
Lower Interest Rates: T-bills tend to pay less interest than corporate bonds because corporate bonds have a potential risk of default, leading investors to demand higher interest rates to compensate for the added risk.
Redemption Process: The process for redeeming T-bills at maturity is the same as for Treasury bonds and notes.
Treasury Bills vs. Treasury Notes vs. Treasury Bonds
Treasury bills, Treasury bonds, and Treasury notes are distinct types of Treasury securities primarily differentiated by their maturities, interest payment schedules, tax treatment, liquidity, and volatility. Treasury bills (T-bills) have the shortest maturities, available in 4, 8, 13, 17, 26, and 52 weeks, and they pay interest at maturity. Treasury bonds (T-bonds) have the longest maturities, spanning 20 or 30 years, and they pay interest every six months. Treasury notes (T-notes) fall in between, with maturities of 2, 3, 5, 7, or 10 years, and they also pay interest every six months. The interest from all three types of securities is exempt from state and local taxation, though it is subject to federal tax. In terms of liquidity, all three are highly liquid. However, their price volatility varies: T-bills have low volatility, T-bonds have medium volatility, and T-notes have medium to high volatility.
How To Buy Treasury Bonds, Treasury Notes, and Treasury Bills
You can acquire Treasury bonds, notes, and bills through the U.S. Treasury at TreasuryDirect.gov or from a bank or broker, but let's prepare you to buy them yourself. First, register for an account at TreasuryDirect.gov, choosing the appropriate account type: individual, business or organizational, or estate or trust. For an individual account, you'll need your Social Security number, driver's license or state ID number, U.S. address, email address, and bank account information. Follow the prompts to complete the registration, including setting up security questions and verifying your email address. Next, link your bank account by entering your routing and account numbers, which TreasuryDirect will verify, possibly through test deposits. To purchase Treasury securities, log in to TreasuryDirect, go to the “BuyDirect” tab, and select Treasury bills, notes, or bonds. Fill in the details such as the amount and maturity time, confirm the purchase details and payment method, then submit your order. You will receive a confirmation of the transaction and its details.
Bottom line
Treasury bonds provide peace of mind with minimal risk and allow you to diversify your portfolio for long-term financial goals. They're an excellent option for conservative investors seeking a steady stream of income. For earning more passive income, investors can also opt for compound real estate bonds as they offer fixed 8.5% APY.
