Treasury Bonds are a popular investment for individuals and corporations who want to receive stable returns or hedge against high-risk securities. According to SIFMA data, there is currently $22.6 trillion worth of Treasury issuances outstanding. The U.S. government will always need cash, making Treasury Bonds an attractive investment.
Before investing in Treasury bonds, it’s an excellent idea to ensure your debt is under control. With Chunk, you can manage all your credit cards in one place and learn how to pay off debt quickly. Our platform enables you to improve your financial health, putting you in a position where you’re comfortable allocating a portion of your income to U.S. Treasury bonds.
The Different Types of Treasury Bonds
The U.S. government issues various types of bonds to finance its operations. It’s essential to note that investors can purchase a Treasury bond and a few other securities that function as a bond. The most popular securities issued by the U.S. Treasury include:
- Treasury Inflation-Protected Securities (TIPS)
- Treasury Bonds
- Treasury Notes
- Treasury Bills
Let’s take a closer look at each bond and explore how they differ.
Treasury Inflation-Protected Securities (TIPS)
The purpose of Treasury inflation-protected securities (TIPS) is to offer an investor a mechanism to protect them against inflation. Individuals must spend at least $100 on TIPS and can continue to invest increments of $100. TIPS has a fixed interest rate and pays interest twice per year. You can purchase TIPS in three terms: five, ten, or thirty years. TIPS holders will receive the greater of the initial principal amount or adjusted principal at the maturity date. In the event of deflation, the principal and interest payments subsequently decrease. However, investors receive the original principal at the maturity date, regardless of deflation. In other words, you won’t necessarily lose money on TIPS if the consumer price index (CPI) decreases.
Treasury Bonds
Treasury bonds come in 20 or 30-year terms and increments of $100. These bonds have a fixed interest rate and the interest is exempt from state and local taxes. Investors receive interest every six months until the bond’s maturity date. Once the bond reaches maturity, the bondholder receives an amount equal to the face value. The U.S. Treasury sells initial bond offerings during February, May, August, and November. Outside of these months, investors can buy previously issued bonds (which typically have a different price). In addition, investors have to pay accrued interest when buying previously issued bonds.
Treasury Notes
Also known as T-notes, Treasury notes are long-term securities with a maturity date ranging from two to ten years. Treasury notes have a fixed interest rate that changes every six months. The U.S. government pays out interest every six months until the investor redeems the note. A Treasury note’s face value may differ from the purchase price, depending on the yield at auction and interest coupon rate. TreasuryDirect does not issue paper notes anymore – all notes are electronic.
Treasury Bills
Treasury bills, otherwise known as T-bills, are short-term securities that mature in four to 52 weeks. Individuals must invest a minimum of $100 in Treasury bills and hold the bill at least 45 days before redeeming. You must pay federal income taxes on the interest income from Treasury bills, but not local or state income taxes.
Factors that Influence Interest Rates
Treasury bond interest rates and prices directly correlate to demand. That is, when there’s high demand for Treasury bonds, investors must pay higher prices. Now, why might demand for Treasury bonds increase? Corporations and Individuals generally see Treasury bonds as a safe investment compared to stocks. A highly volatile stock market or a weakening economy could prompt more investors to buy Treasury bonds. The Federal Open Market Committee (FOMC) may also change interest rates as a form of monetary policy. Of course, higher interest rates encourage investments in bonds. In contrast, lower interest may lead more individuals to invest in stocks and other financial instruments.
Are Treasury Bonds a Risky Investment?
Treasury bonds are generally a risk-free investment. Although there’s a chance that the U.S. government could default on its debt, the likelihood is extremely low. If inflation surpasses the bond’s interest rate, the resale value of the bond plummets. Moreover, increased inflation could cause you to lose money in the long run, depending on the bond’s interest rate. Nevertheless, many individuals, especially those near retirement age, prefer to have their assets in Treasury bonds. On the other hand, financial advisors often recommend that younger investors put more money in stocks at the start of their careers.
How Much Can You Make With Treasury Bonds?
In most cases, an investor must purchase at least $100 worth of Treasury bonds and can buy a maximum of $5 million. Let’s pretend you buy a 30-year Treasury bond with a $10,000 par value and 1.5 percent coupon rate. The 1.5 percent coupon rate means you’ll earn $150 annually if you hold the bond or $75 semi-annually. You can get a better sense of how much you can make by viewing the daily Treasury par yield curve rates. As you can see, the longer you hold the bond, the higher the par yield rate.
Unlike stocks, you typically know how much you’re going to make when you purchase a Treasury bond. The only caveat is buying securities with variable interest rates, such as Treasury bills. As a result, Treasury bonds tend to yield a lower return on investments than options, futures, and stocks.
How to Buy Treasury Bonds
TreasuryDirect.gov is the one-stop-shop for all things Treasury bonds. The easiest way to buy a bond is to create an account, log in, and select “BuyDirect.” Once you’re on the BuyDirect page, you can choose the type of bond you’d like to buy and the purchase amount. TreasuryDirect enables you to purchase bonds via payroll enrollment or with your bank account.
Join Chunk Before You Invest in Treasury Bonds
Are you ready to grow your idle cash by investing in Treasury bonds? Before buying your first Treasury Bond, you should ensure you’re in a solid financial position. Our platform allows you to manage all credit cards in one place and learn how to pay off debt quickly. Not only that, but you can also use our convenient loan payment calculator to save money on interest. Although Treasury bonds are a great investment, it’s always an excellent plan to pay off debt before investing in securities issued by the U.S. government.