U.S. Treasury Bonds (Treasuries) can play an important role in your investment strategy, especially if you are at or near retirement. The term "U.S. Treasury Bonds" is often used as a catch-all phrase for several different types of securities.
Let's examine the three basic types on bonds and how you can use them in your investment program. First, we need to answer the question: why would you want to put your money in a security that consistently pays the lowest interest rates?
The answer is security. U.S. Treasury issues are not only the most secure bond, but also the most secure investment you can make. They are backed by the "full faith and credit" of the U.S. government. For this safety, investors earn a very low return.
The interest on U.S. Treasury issues is exempt from state and local taxes, but not federal income tax.
Bonds, Notes and Bills are sold at competitive auction or you can buy a previously issued security on the secondary market.
A noncompetitive bid guarantees you will get the note because you will accept whatever rate is set at the auction. A competitive bid states what interest rate you will accept. If that happens to be the rate set at the auction, you get the note. If not, you don't get the note. You do not have to attend the auction, which is all done electronically. You submit your bid online or through a participating bank or broker.
People at or near retirement should focus on capital preservation as their main investment goal. Yes, thanks to our longer lives we need to think about growth during retirement to keep pace with inflation, but most of your efforts should go into capital preservation.
That doesn't mean every dollar should go into Treasuries unless you are really risk adverse. There are other products that offer conservative returns that usually exceed Treasuries but fall into the relatively safe categories.
However, if you want to insure that some part of your estate passes to your heirs, no matter what the stock market does, consider Treasuries. A good financial or estate planner can offer other alternatives.
Treasury Bonds
- These bonds mature in 30 years and pays interest every six months.
- They are issued in denominations of $100.
- They pay interest every six months.
- You can buy them from TreasuryDirect - the online sales arm of the U.S. Treasury. Learn more about TreasuryDirect.
- You can also buy or sell a Treasury Bond through most banks or a stockbroker.
- You can hold the bond to maturity when you will receive the full face value or sell them in the secondary bond market.
- If you buy the older bonds from another investor or organization other than the U.S. Government, Treasury Bonds are still backed by the "full faith and credit" of the U.S. government.
Treasury Notes
- Notes have maturities of 2, 3, 5, 7 or 10 years and pay interest every six months until maturity.
- Notes are sold in increments of $100
- The U.S. Treasury sells Notes at frequent public auctions. You bid for notes by placing a competitive or a non-competitive bid.
- You can hold a Note until it matures or sell it in the secondary market.
- Buy Notes through TreasuryDirect or use a bank or broker.
Treasury Bills
- Treasury bills or T-bills are not bonds in the strict sense because their maturities range from a few days to 26 weeks.
- You buy them at a discount from face value and collect the full face value at maturity. The difference is the interest earned.
- For example, a $1,000 13-week bill may sell at auction for $970. When the bill matures, you redeem it for $1,000. The $30 difference is your interest.
Other Treasury Issues
The U.S. Treasury offers a number of other products that may have value to you, including bonds that have inflation protection, savings bonds and others. You can learn more by visiting the U.S. Treasury website.
