What are Treasury Securities

by Investing School on March 11, 2009

Treasury securities are basically debt issued by the government.  There are basically 3 main types of treasury securities that you can buy: the Treasury Bill, Treasury Note and Treasury Bond, which are considered the safest investment for pretty much any investor in the world.

Treasury Bill

A treasury bill, or T-Bill for short, is debt that will be repaid within a year with typical maturity dates of 28, 91, 182, or 362 days from the issue date.  The T-Bills have the shortest repayment period of any publicly available government debt to investors and is considered the safest investment investment of all.

Note that unlike most other investments where an interest is paid, treasury bills are sold instead at an discount at auction time to give investors a positive return.

Treasury Note

Treasury notes, or T-Notes fo short, also represnet debt that the government will repay but the maturity dates of these are typically from two to ten years (they commonly mature in 2, 3, 5, 7 or 10 years).  Unlike treasury bills however, treasury notes pay interests every six months.

I do not know why they make the quotes so confusing but treasury notes are quoted in an not-so-clear way.  To quote wikipedia, the notes are quoted “at percentage of par in thirty-seconds of a point”.  For example, a quote of 96:11 on a note would mean that the note is trading at a discount of 96 and 11/32%.  So this means that a $100 note is trading at $96.34375 (didn’t I tell you it’s confusing?)

Treasury Bonds

Not as popular but definitely still around, the Treasury Bonds, or T-Bonds for short, matures in twenty or thirty years.  Much like the treasury notes, they give out interest every six months and for pension funds and are useful for very long term institutional investors who need to lower their risk as well.

Treasury Inflation Protected Securities

Remember I said there are basically three types of treasury securities you can buy on the market?  Well, the US Treasury Department actually issues a fourth one called the treasury inflation protected securities (TIPS).  These also distribute interests every six months but your principal (and thus the payout) is adjusted according to the Consumer Price Index.  For many that are worried about inflation, this is it.

What Treasury Securities Mean for Us

If it’s safety that you seek, most people can get that with an FDIC insured savings account.  If you have amassed a high net worth and still want to keep most of your funds in cash, then these treasury securities might be worth looking at.

I also believe that everyone should look into adding a little bit of TIPS into their portfolio just to shield themselves from accelerated inflation (a very possible outcome of the U.S. printing money to save the economy from the financial crisis).

I caution you though that these securities give very low interests and having too much of your portfolio in low paying securities is a recipe to underperform in the long run.  Safety vs High Returns.  That’s the question.

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{ 1 comment… read it below or add one }

Ryan March 14, 2009 at 11:32 am

It’s amazing how everyone is flocking to the 10-year note these days. Does anyone think it will crash someday?


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