When it comes to conservative investments, nothing says 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.

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 – These have the shortest range of maturities of all government bonds. Among bills auctioned on a regular schedule, there are five terms: 4 weeks, 8 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 2, 3, 5, 7 and 10 years currently available. The Treasury auctions 2-year notes, 3-year notes, 5-year notes, and 7-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 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 2, 3, 5 and 7-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 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 5 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 offers the safest heaven for Chinese forex reserves.

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.