What is a Treasury Bond?

The interest rate on Series I bonds purchased between November 2023 and April 2024 has been set at 5.27%. This rate is tied to inflation and is adjusted every six months. Investors can find more information about Series I bonds on TreasuryDirect. This suggests that investors can invest in bonds as they provide protection against rising prices and help maintain the purchasing power of the investment.

Let's dive deeper into understanding the concept of treasury bonds. 

Defining a treasury bond 

A treasury bond is a debt security issued by a federal government. It's essentially a loan from the public to the government. In return for lending the government money, investors receive fixed interest payments and the principal amount back at a specific maturity date. The interest income from treasury bonds is often tax-exempt or taxed at a lower rate than other types of income.

How treasury bonds work

Here's a breakdown of how treasury bonds work –

1. Issuance: The government issues treasury bonds at a specified interest rate and maturity date. These bonds can be sold through auctions or directly to investors.

2. Interest payments: Individual and institutional investors receive periodic interest payments, usually semi-annually or annually, based on the bond's coupon rate. The coupon rate is the annual interest rate stated on the bond.

3. Maturity: At the bond's maturity date, the federal government bonds repay the principal amount to the bondholder.

4. Pricing: The price of a treasury bond can fluctuate in the secondary market. It depends on factors such as the treasury yields, time to maturity, and the creditworthiness of the issuing government.

5. Risk and return: Treasury bonds are generally considered low-risk investments because they are backed by the government's ability to tax its citizens. However, the return on treasury bonds is typically lower than that of other investments with higher risk profiles.

Types of treasury bonds

Treasury bills (T-Bills)

Treasury bills are short-term government debt securities issued by the US government with maturities ranging from a few weeks to a year. They are sold at a discount to their face value and mature at par, providing a return to the investor. 

Treasury notes (T-Notes)

Treasury notes are medium-term debt securities with maturities ranging from two to ten years. They are issued at par and pay a fixed rate semi-annually. T-notes are an investment choice for investors seeking a balance between liquidity and return.

Treasury bonds (T-Bonds)

Treasury bonds are long-term debt securities with maturities of 20 to 30 years. They are also issued at par and pay a fixed interest rate semi-annually. T-bonds are often used as a benchmark for long-term market interest rates and are popular among investors seeking a steady income stream over a long period.

Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds that adjust their principal value based on changes in the Consumer Price Index (CPI). This feature helps protect investors from the eroding effects of inflation, making TIPS a popular choice for investors who want to hedge against inflation and earn a real return on their investment.

Savings bonds

Savings bonds are treasury securities that can be purchased through various programs, including Series EE and Series I bonds. These bonds are purchased at a discount to their face value and mature at par. Savings bonds are often long-term investments and may offer tax deferral or exemption.

Floating Rate Notes (FRNs)

Floating Rate Notes (FRNs) are treasury securities with variable interest rates. The interest rate on FRNs is adjusted periodically based on a benchmark rate, such as the London Interbank Offered Rate (LIBOR). FRNs are a good choice for investors who want to protect themselves from rising interest rates.

Features of treasury bonds 

• Treasury bonds have specific maturity dates

• Bonds pay a fixed interest rate periodically

• The bondholder receives the face value at maturity

• Bonds are issued by the US government and redeemed at maturity

• The coupon rate determines the interest amount

• Interest income may be tax-exempt or taxed at a lower rate

• Treasury bonds are liquid and, hence, easy to purchase and exit

• Bonds provide a predictable fixed-income stream

• Backed by the US government

How to purchase a treasury bond 

Understand Treasury bonds

Before purchasing a treasury bond, it's essential to understand its key features, such as maturity dates, interest payments, and tax implications.

Determine investment goals

Identify financial objectives, including desired return, risk tolerance, and time horizon. These factors help choose the appropriate type of treasury bond.

Choose a purchasing method

Treasury bonds can be purchased through various methods, including –

• TreasuryDirect: The official website of the US Treasury Department allows investors to purchase bonds directly

• Brokerages: Many brokerage firms offer US treasury bonds as part of their investment options

Open a brokerage or TreasuryDirect account

To purchase a treasury bond, one needs to open an account with a brokerage firm or TreasuryDirect.

Select the type and maturity of the bond

Choose the type of US treasury bond that suits your investment goals and risk tolerance. Consider factors like maturity date, interest rate, and tax implications.

Place order

Once an investor has selected the desired bond, place the order through the brokerage or TreasuryDirect account. Specify the quantity of bonds one wants to purchase and the price one will pay.

Confirm and monitor purchase

Review order details carefully before confirming. After the purchase is complete, monitor the bond's performance and track any interest payments or price changes.

Manage and track investment

Regularly review investment to ensure it aligns with one’s financial goals. If circumstances change or the investor is dissatisfied with its performance, consider exiting the bond before maturity.

*This is an example only to enhance a consumer's understanding of the strategy being described above and is not to be taken as Blueberry Markets providing personal advice.

Navigating advantages and risks of treasury bonds

Treasury bonds can help diversify investment portfolios, reducing overall risk. By including bonds in the portfolio, investors can balance the risk and return of their investments. However, it's important to be aware of potential risks, such as interest rate, inflation, and liquidity risks. By carefully considering investment goals and risk tolerance, investors can determine if US treasury bonds are suitable for them.

Please note that Blueberry does not issue or make a market in fixed income instruments, including treasury bonds. This article is for informational purposes only and does not constitute financial advice or a recommendation to invest.