Key Takeaways
- Long-term U.S. government debt with 20-30 year maturity.
- Pays fixed semi-annual interest; low credit risk.
- Exempt from state and local taxes on interest.
- Market price inversely affected by interest rate changes.
What is Treasury Bond (T-Bond)?
Treasury Bonds (T-Bonds) are long-term, fixed-income securities issued by the U.S. Department of the Treasury, typically with maturities of 20 or 30 years. They pay interest semi-annually at a fixed rate and are backed by the full faith and credit of the U.S. government, making them a safe haven investment for conservative investors.
These bonds provide predictable income and return the face value at maturity, offering stability amid market volatility.
Key Characteristics
T-Bonds combine low risk with steady income, appealing to long-term investors seeking reliable returns. Key features include:
- Fixed Interest Payments: Paid semi-annually at a rate set during auction, remaining constant throughout the bond’s life.
- Long Maturity: Typically 20 or 30 years, providing higher yields compared to shorter-term Treasuries.
- Low Credit Risk: Backed by the U.S. government, default risk is negligible.
- Liquidity: Easily tradable in the secondary market, though prices fluctuate with interest rates.
- Tax Advantages: Interest income is exempt from state and local taxes but subject to federal income tax.
- Par Yield Curve Relation: The yields on T-Bonds contribute to the par yield curve, a key indicator in bond markets.
How It Works
When you purchase a T-Bond, you lend money to the U.S. government in exchange for fixed interest payments every six months and the return of the bond’s face value at maturity. The bond’s price may fluctuate in the secondary market based on interest rate changes, but holding it to maturity guarantees the stated returns.
The bond’s sensitivity to interest rate changes can be measured by metrics like Macaulay duration, which helps you understand the price volatility relative to interest rate shifts. This is crucial for managing interest rate risk inherent in long-term bonds.
Examples and Use Cases
T-Bonds suit investors seeking stable income or portfolio diversification. Common examples and uses include:
- Retirement Income: Individuals use T-Bonds to secure predictable payments over decades, complementing other assets.
- Portfolio Diversification: Funds like BND include T-Bonds to balance equity risk.
- Corporate Stability: Companies such as Delta may hold T-Bonds as part of their cash management strategy to preserve capital while earning returns.
- Low-Cost Index Funds: Investors can gain exposure to long-term government debt through best low-cost index funds that include T-Bonds in their portfolios.
Important Considerations
While T-Bonds offer security and steady income, they carry interest rate risk; rising rates reduce bond prices, affecting resale value before maturity. Inflation risk is also a factor, as fixed payments may lose purchasing power if inflation outpaces the bond’s interest rate.
Understanding these risks and how T-Bonds fit within your broader investment goals is essential. For diversified bond exposure, you might explore options such as the best bond ETFs that include T-Bonds as part of their holdings.
Final Words
Treasury Bonds offer a reliable, low-risk income stream with fixed interest over decades, making them a solid choice for long-term investors seeking stability. To optimize your portfolio, compare current auction rates and consider how interest rate trends might impact bond prices before committing.
Frequently Asked Questions
A Treasury Bond (T-Bond) is a long-term, fixed-income security issued by the U.S. Department of the Treasury with maturities of 20 or 30 years. It pays interest semi-annually at a fixed rate and is backed by the full faith and credit of the U.S. government, making it a very low-risk investment.
Treasury Bonds pay interest every six months at a fixed rate set at auction. This means investors receive predictable income twice a year until the bond matures, at which point the principal amount is returned.
You can purchase Treasury Bonds electronically through TreasuryDirect with a minimum amount of $100. In auctions, the face value denominations can be in increments of $1,000.
Yes, Treasury Bonds are considered among the safest investments because they are backed by the full faith and credit of the U.S. government. The risk of default is extremely low due to the government's ability to raise taxes or print money if needed.
T-Bonds have the longest maturities of 20 to 30 years and typically offer the highest yields among Treasury securities. In contrast, T-Bills mature in less than a year with no periodic interest, and T-Notes mature between 2 and 10 years with semi-annual interest payments.
Yes, Treasury Bonds can be bought and sold in the secondary market before maturity. However, their prices fluctuate with interest rate changes, meaning bond prices fall when market rates rise and vice versa.
Interest earned on Treasury Bonds is exempt from state and local taxes but is subject to federal income tax. This tax treatment can make T-Bonds more attractive compared to other taxable fixed-income investments.
Yield to Maturity (YTM) represents the total return an investor can expect if they hold the Treasury Bond until it matures. It takes into account the bond’s current price, coupon interest payments, and the principal amount returned at maturity.
