When it comes to low-risk investments, US Treasury securities are among the most trusted. These debt instruments, issued by the US Department of the Treasury, assist fund government operations while providing investors with a consistent return. The most common Treasury securities are Treasury Bills (T-Bills), Treasury Notes (T-Notes), and Treasury Bonds (T-Bonds). Each has a distinct function, with variations in maturity, interest payments, and investment appeal.
What Are Treasury Securities?
Treasury securities are debt obligations issued by the United States government. When you buy one, you are effectively lending money to the government in exchange for periodic interest payments (in most circumstances) and the promise of full repayment of your principal at maturity. They are regarded as one of the world’s safest investments since they are backed by the United States government’s “full faith and credit”.
Treasury Bills (T-Bills)
Definition:
Treasury Bills are short-term securities with maturities from a few days to one year. They are sold at a discount to their face value and do not accrue interest. Instead, the difference between the purchase price and the face value represents the investor’s profits.
Key features:
- Maturities: Common words are 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks.
- Interest Payment: There are no direct interest payments; instead, earnings come from the discount.
- Investment Appeal: Suitable for conservative investors seeking liquidity and little risk.
For example, if you buy a $1,000 T-Bill for $980, you will receive a $20 return upon maturity.
Treasury Notes (T-Notes)
Definition:
Treasury Notes are medium-term securities with maturities of 2–10 years. They pay interest semi-annually, making them an appealing choice for investors looking for consistent income.
Key features:
- Maturities are 2, 3, 5, 7, and 10 years.
- Interest Payment: A fixed interest rate is paid every six months.
- Investment Appeal: Suitable for those seeking consistent income over a moderate time period.
For instance, a 10-year T-Note with a $1,000 face value and a 2% annual interest rate pays $20 yearly in two $10 installments.
Treasury Bonds (T-Bonds)
Definition:
Treasury bonds are long-term securities with maturities of 20-30 years. They pay semi-annual interest, similar to T-Notes, but are better suited to long-term financial goals such as retirement.
Key features:
- Maturities range between 20 and 30 years.
- Interest Payment: The interest is fixed and paid twice a year.
- Investment Appeal: Suitable for investors seeking to lock in a guaranteed return over decades.
For a 30-year T-Bond with a $1,000 face value and a 3% annual interest rate, the annual payment is $30 in two $15 payments.
Comparison: T-Bills, T-Notes, and T-Bonds
| Feature | Treasury Bills (T-Bills) | Treasury Notes (T-Notes) | Treasury Bonds (T-Bonds) |
| Maturity | 4 weeks to 1 year | 2 to 10 years | 20 to 30 years |
| Interest | No periodic interest | Semi-annual interest | Semi-annual interest |
| Risk Level | Lowest | Low | Low |
| Liquidity | Highly liquid | Moderately liquid | Less liquid |
| Purpose | Short-term savings | Medium-term income | Long-term income |
Why Invest in Treasury Securities?
- Safety: Backed by the U.S. government, they offer virtually zero default risk.
- Steady Income: T-Notes and T-Bonds provide predictable interest payments.
- Liquidity: T-Bills, in particular, are highly liquid and can be easily sold.
- Diversification: Adding Treasury securities to your portfolio can help balance risk.
- Tax Advantages: Interest income is exempt from state and local taxes, although it is subject to federal tax.
How to Invest in Treasury Securities
- Through TreasuryDirect: Individuals can purchase T-Bills, T-Notes, and T-Bonds directly from the U.S. Treasury via the TreasuryDirect website.
- Secondary Market: Treasury securities can also be bought and sold through brokers or financial institutions.
- Mutual Funds or ETFs: Some funds specialize in Treasury securities, offering a diversified and professionally managed option.
Key Considerations
Interest Rate Risk: Longer-term securities like T-Bonds are more sensitive to interest rate changes, which can affect their market value.
Inflation Risk: Fixed interest payments may lose purchasing power during periods of high inflation.
Opportunity Cost: The low returns on Treasury securities may be less attractive compared to other investments during a strong economy.
Conclusion
Treasury Bills, Notes, and Bonds are critical instruments for conservative investors looking for stability, liquidity, and predictable returns. Whether you’re saving for a short-term goal, seeking a consistent income, or planning for the future, there’s a Treasury security to meet your needs. Understanding their unique qualities and potential hazards allows you to make informed selections that correspond with your financial objectives.
