Treasury Securities are widely regarded as one of the safest investments, or as close as you can get to “risk-free,” because they are backed by the full faith and credit of the U.S. government. Here is everything you need to know:

What are Treasury Securities?

Treasury securities, also known as treasuries, are loans to the government. When you buy a Treasury Security, you are lending money to the government, and the government promises to pay you back the loan plus interest.

There are three important components that make up a Treasury Security:

• Face Value: A bond's face value, also known as its par value, is the amount of money that the bond issuer (government) promises to pay the investor at the end of its term.

• Term: The time between when the bond is issued and when it matures.

• Interest: The amount of money paid out periodically (typically semiannually, or every six months).

The U.S. government issues Treasury Securities to raise money to fund its operations, such as building and maintaining roads, school funding, and infrastructure and military projects.

Treasury Securities can either be bonds, bills, or notes depending on the terms. Here are the differences between the three:

Treasury Bills (T-bills)

Treasury Bills have the shortest maturity time of the three types of bonds. You can purchase five different lengths of maturity:

• 4 weeks

• 8 weeks

• 13 weeks

• 26 weeks

• 52 weeks

Because of their shorter term, T-bills are sold at a discount to their face value and do not pay periodic interest. The interest is the difference between the purchase price and the face value paid at maturity.

Treasury Notes (T-Notes)

Treasury Notes have longer maturity times than T-bills but shorter than T-bonds. There are five different lengths to maturity:

• 2 years

• 3 years

• 5 years

• 7 years

• 10 years

Treasury Notes are issued at a $100 face value and mature at the same price but pay interest semiannually at a fixed rate.

Treasury Bonds (T-Bonds)

Treasury Bonds are the longest-term securities with terms of 20+ years. There are two different lengths of maturity:

• 20 years

• 30 years

Since Treasury Bonds require investors to part ways with their money for a longer period of time, the interest rates are typically higher.

How are treasuries taxed?

Interest income earned from Treasury Bills, Notes, and Bonds is subject to federal income taxes but is exempt from state and local income taxes. This makes them a good investment to add to your taxable brokerage account.

Where can I buy treasuries?

There are three ways you can buy Treasury Securities:

1. TreasuryDirect.gov: You can buy Treasury Securities directly from the government at auctions on their website (here is their upcoming schedule).

2. Secondary Market: You can buy Treasury Securities second-hand from your broker or bank. This often offers more flexibility in terms of yield, price, and timing.

3. Funds: Lastly, Treasury Securities can be bought indirectly through exchange-traded funds (ETFs), mutual funds, and money market funds.

What are the risks?

Although backed by the full faith of the U.S. government, like any investment, treasuries still carry risk.

The price of a Treasury Security and its interest rate have an inverse relationship (meaning when one goes up, the other goes down, and vice versa). If the interest rate on Treasury Securities increases significantly after you purchase, then your bill, note, or bond will be worth less than what you paid for it if you want to sell it on the secondary market.

Your two options are:

• Sell it for a loss, or

• Accept the rate of return and hold it until maturity.

If you decide to hold, there is an opportunity cost in having your money tied up in a Treasury Security when you could have invested in better-performing assets.

Conclusion

Treasuries aren’t very sexy, but depending on your risk tolerance and time-horizon, they could be a good addition to your portfolio.

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See you next week.

Darrell