What Is a Treasury Bond (T-Bond)?
Treasury bonds (T-bonds) are government debt securities issued by the U.S. Federal government that have maturities of 20 or 30 years. T-bonds earn periodic interest until maturity, at which point the owner is also paid a par amount equal to the principal.
Treasury bonds are part of the larger category of U.S. sovereign debt known collectively as Treasuries, which are typically regarded as virtually risk-free since they are backed by the U.S. government's ability to tax its citizens.
Key Takeaways
- Treasury bonds (T-bonds) are fixed-rate U.S. government debt securities with a maturity of 20 or 30 years.
- T-bonds pay semiannual interest payments until maturity, at which point the face value of the bond is paid to the owner.
- Along with Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities (TIPS), Treasury bonds are one of four virtually risk-free government-issued securities.
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Understanding Treasury Bonds (T-Bonds)
Treasury bonds (T-bonds) are one of four types of debt issued by the U.S. Department of the Treasury to finance the U.S. government’s spending activities. The four types of debt are Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS). These securities vary by maturity and coupon payments.
All of them are considered benchmarks to their comparable fixed-income categories because they are virtually risk-free. T-bonds are backed by the U.S. government, and the U.S. government can raise taxes and increase revenue to ensure full payments.
These investments are also considered benchmarks in their respective fixed-income categories because they offer a base risk-free rate of investment with the categories' lowest return. T-bonds have long durations, issued with maturities of 20 and 30 years.
As is true for other government bonds, T-bonds make interest payments semiannually, and the income received is only taxed at the federal level. Treasury bonds are issued at monthly online auctions held directly by the U.S. Treasury. A bond's price and its yield are determined during the auction. After that, T-bonds are traded actively in the secondary market and can be purchased through a bank or broker.
Individual investors often use T-bonds to keep a portion of their retirement savings risk-free, to provide a steady income in retirement, or to set aside savings for a child's education or other major expenses. Investors must hold their T-bonds for a minimum of 45 days before they can be sold on the secondary market.
Treasury Bond Considerations
Treasury Bond Maturity Ranges
Treasury bonds are issued with maturities of 20 or 30 years. They are issued with a minimum denomination of $100, and coupon payments on the bonds are paid semi-annually. The bonds are initially sold through an auction; the maximum purchase amount is $5 million if the bid is non-competitive (or 35% of the offering if the bid is competitive).
A competitive bid states the rate the bidder is willing to accept; it is accepted depending on how it compares with the set rate of the bond. A non-competitive bid ensures the bidder gets the bond, but they have to accept the set rate. After the auction, the bonds can be sold in the secondary market.
The Treasury Bond Secondary Market
There is an active secondary market for T-bonds, making the investments highly liquid. The secondary market also makes the price of T-bonds fluctuate considerably in the trading market. As such, current auction and yield rates of T-bonds dictate their pricing levels on the secondary market.
Similar to other types of bonds, T-bonds on the secondary market see prices go down when auction rates increase because the value of the bond’s future cash flows is discounted at a higher rate. Inversely, when prices increase, auction rate yields decrease.
Treasury Bond Yields
In the fixed-income market, T-bond yields help to form the yield curve, which includes the full range of investments offered by the U.S. government. The yield curve diagrams yield by maturity, and it is most often upward-sloping (with lower maturities offering lower rates than longer-dated maturities). However, the yield curve can become inverted when long-term rates are lower than short-term rates. An inverted yield curve can signal an upcoming recession.
What Are the Types of Treasuries?
There are three main types of U.S. Treasuries: bonds, notes, and bills. Bills mature in less than a year, notes in two to five years, and bonds in 20 or 30 years. All are backed by the full faith of the U.S. government.
How Do You Buy T-Bonds?
To buy T-bonds, you can head to Treasurydirect.gov, create an account, and purchase your bonds directly from the government on the website.
Are Treasury Bonds a Good Investment?
Whether Treasury bonds are a good investment will depend on the specific investor. Treasury bonds are considered risk-free assets, so investors with a low risk tolerance would find these assets suitable; however, because of their safety, they pay a low interest rate, limiting returns. These can be good options in a declining equities market for some investors. Additionally, though they are risk-free, Treasury bonds are susceptible to inflation risk and interest-rate risk, which could reduce the returns for an investor.
The Bottom Line
Treasury bonds are part of the collective of U.S. Treasuries. They are low-risk assets that investors can choose when looking for safe but low returns. You can invest in Treasury bonds through exchange traded funds (ETFs) and mutual funds. The gilt is the United Kingdom's version of this security. It also trades through gilt funds.
Treasury bonds are also a good option for investors seeking a haven from volatile equity markets. Because Treasury bonds are backed by the full faith of the U.S. government, which has the largest and one of the most stable economies in the world, they are considered risk-free investments.
