Treasury Bonds

U.S. Treasury securities are debt obligations of the U.S. government, the largest debt issuer in the world. Since these debt obligations are backed by the “full faith and credit” of the US government, and thus by its ability to raise tax revenues and print currency, U.S. Treasury securities are considered the safest of all investments. They are viewed in the market as having no “credit risk,” meaning that it is virtually certain your interest and principal will be paid on time.

Due to the unique degree of safety provided in the US Treasury as a credit, the interest offered by US Treasuries is ordinarily lower than for other widely traded debt with similar length of maturity, such as corporate bonds.

Treasury bonds can have certain positive tax attributes - US Treasury interest is not taxable at the state or local level.

US Treasury securities are divided into Treasury bills (auctioned in 3 month, 6 month and 1 year maturities), Treasury notes (2 year, 5 year, 10 year and 30 year) and Series I Bonds and 10 year TIPS. Series I Bonds must be purchased directly from the U.S. Treasury. All other US Treasury securities may be purchased at auction directly from the U.S. Treasury or through primary deals (a series of investment banks). There is also a very vibrant secondary market for all US Treasuries, which ensures liquidity (although the price will fall dramatically if yields rise).

The US Treasury Bond Yield curve lists the current yields on primary and secondary offerings of US Treasury securities.

Long duration Treasuries are not cash equivalent securities as they may lose value quickly if interest rates rise. Moreover, they are not recommended at this time because long-term interest rates remain near all-time lows, and there is little opportunity for them to fall further (and bonds to appreciate) as interest rates rise. Moreover, since the yield curve lacks any slope, purchasers are not offered any time premium for lending over longer periods.

However, as short term rates have started to rise, short duration Treasuries, have emerged as competitive with fully-taxible short term Certificates of Deposit, especially for those in higher state and local tax areas. In order to determine the fully taxible equivalent to a US Treasury, divide the Treasury rate by the reciprocal of your cumulative state and local tax obligations.

(Treasury rate) / (1 - Your state and local tax rate)

The purchase of longer duration Treasury bonds near maturity at a premium in secondary markets can provide tax losses on maturity - a positive tax attribute that can offset gains that you may have.

Series I Treasury Bonds and TIPS:

Series I Treasury Bonds may protects your principal from losing value and provides you with a competitive return, although the return is lessened by a three month interest penalty where you redeem the bond in fewer than five years from the issue date (and the bond absolutely cannot be redeemed within one year of issue).

TIPS may also protect against a loss of value of your principal due to inflation, but ordinarily bear greater risk of decline in value of principal (unless you are purchasing TIPS on the secondary market that are near maturity).

Both TIPS and I Bonds are US Treasury instruments with the same perfect credit that are tied to the Consumer Price Index for Urban Consumers (CPI-U) and therefore provide better protection that ordinary US Treasuries in a rising interest rate environment. I Bonds adjust to the rising interest rate environment through semi-annually adjusted changes in the interest rate; TIPS through adjustments in the value of the principal.

Series EE bonds, which until recently were reset according to the prevailing 5-year Treasury rate, have recently been restructured so that the rate is set at purchase for the life of the bond. These bonds, therefore, no longer provide additional interest rate protection that ordinary US Treasury instruments do not provide.

Avoiding the Pitfalls of Treasury Bonds:

Please note that if you are purchasing TIPS or ordinary Treasuries through a bank, virtually all banks charge a commission. Find out what commission your bank is charging before entering into any Treasury transactions. I Bonds must be purchased directly from the U.S. Treasury.

Financial products of all nature bear inherent risks and this website is not a financial advisory service; it is a forum for users to share and to compare notes and observations on financial publications. The website provides, free of charge, the technical and logistical apparatus and the medium for users to share and to publish financial information and to comment on publications. As such, the website’s operator can not and does not take responsibility for information, observations or opinions of any sort or nature provided by third parties with whom it is not affiliated who use the website to publish, to comment or as a means of solicitation. Users are specifically warned against following any advice related to specific instruments, including, but not limited to, equity securities, that may be provided by other users directly on this site or on web pages to which other users have provided links on this site. BestCashCow.com can not and does not check or verify the qualificatio ons and credentials of users who publish or comment on this site or on linked pages. Users should seek personalized advice from qualified professionals regarding all personal financial issues and evaluate the risks and applicability to their own circumstances of each financial product discussed regardless of who the publisher is or purports to be. Should you, through your use of this site, identify an individual or organization purporting to offer personalized advice, you bear all responsibility to ensure that the individual or organization has the qualifications that they may represent on the website, and that their advice is appropriate for your circumstances. On certain webpages, BestCashCow.com provides information related to rates on US-based savings accounts, CDs, short-term government bonds, and other US cash equivalent securities, also free of charge to internet users for their independent use. The accuracy of this information is not guaranteed, and the information, like all other information on this website, should not be construed to provide investment advice, nor to endorse a financial product of any sort.

© 2007 BestCashCow.com, LLC. All Rights Reserved. Terms under which this service is provided to you. Privacy Policy.