Introduction to Treasury Securities

When it comes to conservative investments, nothing says the safety of principal like Treasury securities. These instruments have stood for decades as a bastion of safety in the turbulence of the investment markets—the last line of defense against any possible loss of principal.

The guarantees that stand behind these securities are indeed regarded as one of the key cornerstones of both the domestic and international economy, and they are attractive to both individual and institutional investors for many reasons.

Key Takeaways

  • Treasury securities are one of the safest investments as they are backed by the full faith and credit of the U.S. government.
  • Treasury securities are divided into three primary categories according to the length of maturity. These are Treasury Bills, Treasury Bonds, and Treasury Notes.
  • All of these Treasury securities can be purchased directly from the U.S. government on the website, TreasuryDirect.gov, or through a bank or broker.
  • Though treasuries are considered low-risk, they do come with some risks, such as being impacted by inflation and changes in interest rates.
  • Because Treasuries are safe investments, their yields are fairly low.
  • The interest paid on Treasury securities is taxable on the Federal level.

Basic Characteristics of Treasury Securities

Treasury securities are divided into three categories according to their lengths of maturities. These three types of bonds share many common characteristics, but also have some key differences. The categories and key features of treasury securities include:

T-Bills

T-Bills have the shortest range of maturities of all government bonds. Among bills auctioned on a regular schedule, there are five terms: four weeks, eight weeks, 13 weeks, 26 weeks, and 52 weeks. Another bill, the cash management bill, isn't auctioned on a regular schedule. It is issued in variable terms, usually of only a matter of days.

These are the only type of treasury security found in both the capital and money markets, as three of the maturity terms fall under the 270-day dividing line between them.

T-Bills are issued at a discount and mature at par value, with the difference between the purchase and sale prices constituting the interest paid on the bill.

T-Notes

These notes represent the middle range of maturities in the treasury family, with maturity terms of two, three, five, seven, and 10 years currently available. The Treasury auctions two-year notes, three-year notes, five-year notes, and seven-year notes every month. The agency auctions 10-year notes at original issue in February, May, August, and November, and as reopenings in the other eight months. Treasury notes are issued at a $100 par value and mature at the same price. They pay interest semiannually.

T-Bonds

Commonly referred to in the investment community as the “long bond,” T-Bonds are essentially identical to T-Notes except that they mature in 30 years. T-Bonds are also issued at and mature at a $100 par value and pay interest semiannually. Treasury bonds are auctioned monthly. Bonds are auctioned at the original issue in February, May, August, and November, and then as reopenings in the other eight months.

Auction Purchase of Treasury Securities

All three types of Treasury securities can be purchased online at auction in $100 increments; however, not every maturity term for each type of security is available at every auction. For example, the two, three, five, and seven-year T-Notes are available each month at auction, but the 10-year T-Note is only offered quarterly.

All maturities of T-Bills are offered weekly except for the 52-week maturity, which is auctioned once each month. Employees who wish to purchase Treasury securities may do so through the TreasuryDirect Payroll Savings Plan. This program allows investors to automatically defer a portion of their paychecks into a TreasuryDirect account. The employee then uses these funds to purchase treasury securities electronically.

Taxpayers can also funnel their income tax refunds directly into a TreasuryDirect account for the same purpose. Paper certificates are no longer issued for Treasury securities, and all accounts and purchases are now recorded in an electronic book-entry system.

Risk and Reward of Treasury Securities

The greatest advantage of Treasury securities is that they are, of course, unconditionally backed by the full faith and credit of the U.S. government. Investors are guaranteed the return of both their interest and the principal that they are due, as long as they hold them to maturity; however, even Treasury securities come with some risk.

Like all guaranteed financial instruments, Treasuries are vulnerable to both inflation and changes in interest rates. The interest rates paid by T-Bills and Notes are also among the lowest of any type of bond or fixed-income security, and typically only exceed the rates offered by cash accounts such as money market funds.

The U.S. government issues Treasury securities in order to raise money for government spending as an additional method to taxation.

The 30-year bond pays a higher rate because of its longer maturity and may be competitive with other offerings with shorter maturities; however, Treasury securities no longer come with call features, which are commonly attached to many corporate and municipal offerings. Call features allow bond issuers to call back their offerings after a certain time period, such as five years and then reissue new securities that may pay a lower interest rate.

The vast majority of Treasury securities also trade in the secondary market in the same manner as other types of bonds. Their prices rise accordingly when interest rates drop and vice-versa. They can be bought and sold through virtually any broker or retail money manager as well as banks and other savings institutions. Investors who purchase Treasury securities in the secondary market are still guaranteed to receive the remaining interest payments on the bond plus its face value at maturity (which may be more or less than what they paid the seller for them).

Tax Treatment of Treasury Securities

The same tax rules apply for all three types of Treasury securities. The interest paid on T-bills, T-notes, and T-bonds is fully taxable at the federal level but is unconditionally tax-free for states and localities. The difference between the issue and maturity prices of T-Bills is classified as interest for this purpose.

Investors who also realize profits or losses on Treasuries that they traded in the secondary markets must report short- or long-term capital gains and losses accordingly. Each year, the Treasury Department sends investors Form 1099-INT, which shows the taxable interest that must be reported on the 1040.

Who Buys Treasury Securities?

Treasury securities are used by virtually every type of investor in the market. Individuals, institutions, estates, trusts, and corporations all use Treasury securities for various purposes. Many investment funds use Treasuries to meet certain objectives while satisfying their fiduciary requirements, and individual investors often purchase these securities because they can count on receiving their principal and interest according to the specified schedule—without fear of them being called out prematurely.

Fixed-income investors who live in states with high-income tax rates can also benefit from the tax exemption of Treasuries at the state and local levels.

Other countries can also purchase Treasury securities, providing them with a percentage of U.S. debt. The largest foreign government holders of U.S. debt include Japan, China, the U.K., Brazil, and Ireland. There can be several reasons why other countries might buy U.S. debt. In China's case, U.S. Treasury bonds offer the safest haven for Chinese forex reserves.

What Are Treasury Inflation-Protected Securities?

Treasury inflation-protected securities, known as "TIPS," are Treasury securities issued by the U.S. government that are indexed to inflation in order to protect investors from inflation, which results in the diminishing value of their money. As inflation rises, so too does the principal portion of the bond.

What Are the Different Types of Treasury Securities Available?

The U.S. government has a variety of different Treasury securities available for purchase depending on what the investor is looking for. The different offerings of the securities are Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation-Protected Securities (TIPS), Floating Rate Notes (FRNs), Series I Savings Bonds, and Series EE Savings Bonds.

How Do You Buy Treasury Securities?

The best way to buy Treasury securities is directly from the government on the website, TreasuryDirect.gov. Treasury securities are also available for purchase through most banks and brokers.

The Bottom Line

Treasury securities comprise a significant segment of the domestic and international bond markets. For more information on Treasury securities, visit www.treasurydirect.gov. This useful website contains a wealth of information on T-Bills, T-notes, and T-bonds, including complete auction schedules, a system search for those who need to inquire whether they still own bonds, a list of all bonds that have stopped paying interest, and a plethora of other resources.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. TreasuryDirect.gov. "Treasury Bills."

  2. J.P. Morgan Asset Management. "JP Morgan 100% U.S. Treasury Securities Money Market Fund."

  3. TreasuryDirect.gov. "Treasury Bills In Depth."

  4. TreasuryDirect.gov. "Treasury Notes: Rates & Terms."

  5. TreasuryDirect.gov. "Treasury Bonds: Rates & Terms."

  6. TreasuryDirect.gov. "Learn More About The Payroll Savings Plan."

  7. TreasuryDirect.gov. "Using Your Tax Refund for TreasuryDirect."

  8. TreasuryDirect.gov. "Treasury Bond Calls."

  9. FINRA. "U.S. Treasury Securities."

  10. Internal Revenue Service. "Topic No. 403 Interest Received."

  11. Internal Revenue Service. "Instructions for Forms 1099-INT and 1099-OID."

  12. FINRA. "Buying and Selling Bonds."

  13. TreasuryDirect.gov. "Treasury Securities & Programs."

  14. TreasuryDirect.gov. "TreasuryDirect."

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