Investing 101: Treasuries

Welcome once again to the ongoing feature where we take a closer look at various types of investments.  This week, we take a closer look at one of the most popular investment choices in recent months, Treasury bonds, notes, and bills.

Q: Alright, so what are Treasuries?

A: Treasuries are bonds issued by the United States government.  Basically, similar to any other bond, you give the government money up front and receive the promise of the money being returned in the future, with interest being paid on the investment along the way.  The national debt is composed in large part of the future obligations to repay these Treasuries; therefore, owning Treasuries means you are one of the US government’s creditors.

Treasuries come in several varieties, depending on the duration.  Treasury bills mature in less than a year, and they are sold at a discount to the face value, with the interest being paid by the bill’s worth increasing to the face value.  Treasury notes have maturity dates of 2 to 10 years, while Treasury bonds have 30 year maturities, and both of these types of Treasuries pay interest every six months.

Q: Um, cool.  But why invest in Treasuries?

A: Besides the ability to call yourself Uncle Sam’s loan shark, the biggest benefit to Treasuries is that they are very safe.  As long as the United States government doesn’t declare bankruptcy (which is quite unlikely) you are certain to get the promised interest and to receive your invested money back.  Because of this, Treasuries are considered incredibly safe investments, to the point that they are essentially ‘risk-free’.

Q: Sounds like the investment for me!  But why did you put ‘risk-free’ in quotation marks?

A: Here’s the downside: because Treasuries are so low risk, they can pay much lower interest than other investments.  (The greater the chance that you will lose money with an investment, the more interest you need to receive to make the investment worth the risk.)  As a result, if you invest in Treasuries, you will have to worry that inflation will erode the purchasing power of your investment; this is called ‘interest-rate risk’, and it’s unavoidable, even with an otherwise ultra-safe investment.

Because of the incredibly safe nature of Treasury investments, they do make a good standard of comparison for other investments.  If you are taking more risk than Treasury investments (essentially, any sort of investment risk at all) without getting a greater return, you should rethink your investments and either reduce your risks or seek higher yields.

Q: That sounds reasonable.  How should I use Treasuries in my portfolio?

A: Because of their level of safety, you can use Treasuries in your portfolio in much the same way as many of the other cash-equivalents we’ve already discussed.  They can also fill a portion of your bond allocation, particularly if you are looking for more stability and trying to prevent the loss of any of your principle.

Q: Sounds good.  Any last advice on Treasuries?

A: While you can find plenty of mutual funds that invest in Treasuries, it might be better for you to simply cut out the middle man (and the associated expenses) by buying Treasuries directly from the government.  Treasuries tend to be rather inexpensive to purchase, especially in comparison to other bonds, making it easy to get a diversified portfolio.  The Treasury Direct website allows you to learn more about Treasuries as well as purchase all the varieties of Treasuries you could want.

Finally, there are other variations on regular Treasuries, such as I-Bonds and Treasury Inflation Protected Securities (TIPS) that can serve as ways to hedge against inflation.  These Treasuries increase in value according to the rate of inflation, allowing you to protect your money against rising inflation rates.  We’ll look into these investments more in the near future.

That concludes our look into Treasury notes, bills, and bonds.  All of these investments provide a very low risk place to put your money, locking in interest rates and protecting yourself from investment losses, if not rising interest rates.

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