Is it Good to Invest in Treasury Securities?

What Are Treasury Securities?

In 1789, an Act of Congress established the Treasury Department (U.S. Department of the Treasury) to manage the money of the United States. As a result, they created officers to ensure the proper allocation of funds. They included the Secretary of the Treasury, Comptroller, Auditor, Treasurer, Register, and an Assistant to the Secretary of the Treasury.

The Bureau of Public Debt evolved from the Register of the Treasury and became the Public Debt Service in 1919. It borrows money needed to run the Federal Government and accounts for the public debt by issuing and servicing Treasury securities. For instance, they financed the United States’ participation in World War I.

Securities are publicly or privately issued fungible and negotiable financial instruments used to raise capital. Therefore, the U.S. Department of the Treasury issues these debt obligations as Treasury securities. They include Treasury bills, notes, bonds, FRNs, TIPS, and U.S. Savings Bonds. Consequently, their backing by the full faith and credit of the U.S. government makes them one of the safest investments.

T-bills (Treasury bills)

Short-term and mature in less than a year.
Purchased for price less that or equal to their par (face) value.
Par value paid at maturity.
Interest is the face value minus the purchase price and only paid at maturity.
Sold in increments of $100 with minimum purchase of $100.
Issued in electronic form.
Can hold until it matures or sold before maturity date.
5 Maturity terms: 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks.
The auctions for 52-wk bills occur every four weeks.

T-notes (Treasury notes)

Longer term securities issued in terms of 2, 3, 5, 7, and 10 years.
Issued in electronic form at stated interest rate applied to the face value.
The auction determines the price and interest rate.
Semiannual interest payments.
Face value paid at maturity.
Minimum purchase is $100 and sold in $100 increments.
Option to sell before maturity date.
45 days minimum term of ownership.
Sometimes purchaser pays accrued interest.
Auctions for 2-year, 3-year, 5-year, and 7-years notes occur monthly.
Original issue 10-year notes are auctioned in February, May, August, and November with re-openings auctioned in the other months.
Thus, a reopened security involves an auction of an additional amount on a previously issued security at a different issue date and price.

Treasury Bonds

Maturity date exceeds 10 years from issue date with terms of 20 and 30 years.
Electronically issued at stated interest rate applied to the face value.
Semiannual interest payments.
$100 minimum purchase price and sold in $100 increments.
Auctioned monthly.
Can sell before maturity date with 45 days minimum term of ownership.
Auctions for the original issues occur in February, May , August, and November. During the other months, re-openings occur.
Sometimes the purchaser pays accrued interest.

FRNs (Floating Rate Notes)

The U.S. Treasury added them to its marketable security auction rules in July 2013 and begin issuing them the next year.
Electronically issued.
Two-year maturity term.
Minimum $100 purchase price and sold in $100 increments.
Quarterly interest payment changes over time.
Rise in interest rates corresponds with rise in interest payment amounts. Similarly, the decrease in interest rates results in the decrease in interest payment amounts.
Indexed to the most recent 13-week Treasury bill auction High Rate prior to the lockout period.
The lockout period is the highest accepted discount rate in a Treasury bill auction.
Sometimes the purchaser pays accrued interest.
Paid at face value at maturity.
Original issues auctioned monthly in January, April, July, and October while re-openings occur in the other months.

TIPS (Treasury Inflated-Protected Securities)

Electronically issued in 5-year, 10-year, and 30-year terms at stated interest rate applied to the face amount.
Sold in $100 increments with $100 minimum purchase price.
Interest paid every six months.
Principal value is adjusted to reflect inflation or deflation as measured by the Consumer Price Index.
The Consumer Price Index is the Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers (CPI-U).
5-year TIPS auctions occur in April, June, October, and December with re-openings in June and December.
10-year TIPS have auctions in January, March, May, July, September, and November with re-openings in March, May, September, and November.
30-year TIPS are auctioned in February and August with re-openings in August.
Sometimes the purchaser pays accrued interest.
Can be taxed on the growth of the principal in the year of the growth.
Receive the greater of the adjusted principal or original principal amount at maturity.
Can hold until maturity or sell it in a secondary market before maturity date.

U.S. Savings Bonds

Only payable to the person they’re registered to.
Can purchase starting at $25 or more.
Interest earned up to 30 years.
Redeemable after one year.
Interest earned monthly and compounded semiannually until maturity or cash out date.
Subject to Federal income tax but no state or local tax applied.
May be eligible for tax benefits when you use the money for higher education.

Two types:

1) the Series EE Bond

Interest earned depends on the issuance date of the bond.
Electronic version only and sold at face value.
However, there’s a $10,000 limit on purchases per Social Security Number per calendar year.

2) the Series I Bond

Electronic and sold at face value.
Paper version available for purchase with IRS tax refund at face value.
The fixed rate at purchase and the semi-annual calculated interest rate determines the interest earned.
Consequently, there’s a $10,000 purchase limitation per Social Security Number per calendar year for the electronic version. In addition, there’s a $5,000 purchase limitation when using a tax refund for paper version.

How Do You Purchase Treasury Securities?

They’re sold at a Treasury auction or in the securities market. Press releases are issued before each auction. You can bid competitively or noncompetitively but not both in the same auction. TreasuryDirect only accepts noncompetitive bids. Banks, brokers, and dealers handle competitive bids.

Successful bidders receive securities at the same price which is equal to the highest rate, yield, or discount margin of the competitive bids awarded. As a result, bidders’ accounts are charged when the Treasury delivers the securities on the securities’ issue date.

Competitive bids

First, the bidder must specify the return they want to receive. Second, they’re limited to 35% of the offering amount. In addition, they must go through a bank, broker, or dealer to submit their bid.

Noncompetitive bids

On the other hand, bidders don’t have to specify the return they want to receive. However, bids cannot exceed $5 million per auction. But, the bidder receives the full amount of the security wanted at the return determined at that auction. As a result, most individual investors bid non-competitively.

Should You Invest in Treasury Securities?

Most importantly, Treasury Securities vary in maturity terms and interest earned. Moreover, they’re backed by the full faith and credit of the U.S. government making them a low-risk investment. Additionally, some of the longer-term securities offer quarterly and semiannual interest payments. Thus, creating a regular source of income. However, they have a lower rate of return when compared to higher-risk investments.

Therefore, the bottom line is it’s up to your income-generating intentions. Furthermore, if you want to park your money in a safe place then they’re a great place to store it. In addition, you’ll earn a little money while you’re at it.

However, diversification is key to a responsible investment strategy. That is to say, you’ll mix low-risk and high-risk investments to maximize your investment income. As a result, you increase your chances of higher net worth.