Investing in U.S. Treasury and Agency Bonds

Known for their safety, Treasury Bills, Notes, and Bonds are backed by the “full faith and credit” of the U.S. Government. Also called T-Bills, T-Notes, and T-Bonds, these debt obligations by the Department of the Treasury are highly liquid, secure, and relatively low in risk and yield compared to other investments.

The U.S. Treasury is responsible for “promoting economic prosperity and ensuring the financial security of the United States.” The agency collects taxes, manages currency and public debt, and advises related domestic and international policies. Its securities allow ordinary short and long-term investors to loan to the government and invest in its activities for a return.

T-Bills

Treasury Bills are short-term securities that appeal to short-term investors. Typically auctioned for four, eight, 13, 26, and 52-week terms, they are most often sold below face value, called par. After being sold at a discount, they are redeemed at par upon maturity, and the difference, which includes the interest earned, is paid upon maturity as well.

T-Bills are an interim use of money for savings or in preparation for investing activity. This way, investors can hold money temporarily to grow before buying stocks, alternative investments, or consumer items. T-Bills also appeal to short-term investors who would like to wait a short time until economic conditions warrant more favorable terms or rates on purchases before buying.

T-Notes and T-Bonds

T-Notes are auctioned for yields of two, three, five, and seven years, and T-Bonds are auctioned for a yield of 30 years. The Treasury issues both to the public at $1,000 increments and pays semiannual interest. Because of the extended length and reputation for safety, T-Notes and T-Bonds tend to appeal to longer-term investors interested in financing school or retirement.

Zero-Coupons

Also known as “Treasury Zeros,” zero-coupon Treasury securities are discounted to a value that will return the current market interest rate. Their prices rise and fall with market conditions as interest rates change. Local municipalities can also issue zero-coupon securities that are often tax-exempt at the federal, state, and local levels.

Agency Bonds

While similar to T-Bonds, agency bonds are issued by institutions such as Ginnie Mae, Fannie Mae, and Freddie Mac. Each of these examples is in the business of home loans in the secondary mortgage market. Ginnie Mae is a federal government agency, and the latter two are publicly traded, approved government-sponsored entities that sell mortgage-backed securities by buying loans from private lenders. Those agency bonds issued by agencies are backed by the full faith and credit of the U.S. Government, whereas those issued by the approved, chartered corporations are not.

The tax treatment of agency bonds varies by issuer, and certain agency bonds are tax-exempt at the state level. For example, Ginnie Mae, Fannie Mae, and Freddie Mac agency bonds are fully taxable at the federal and state level, but agency bonds from the U.S. Postal Service and Federal Home Loan Banks are state-tax exempt.

Treasury Inflation-Protected Securities

TIPS are an increasingly popular security that protect portfolios from inflation by indexing the bond’s principal to inflation. The increase in principal is taxable income, even though the investor will not see the money until the bond matures.

While the principal is tied to inflation, the fixed interest rate is tied to the principal. When the principal increases with inflation, the interest paid rises according to the principal’s increase. The interest payments, like with T-Notes and T-Bonds, are made semiannually.

Upon maturity after 5, 10, or 30 years, the investor is paid the greater of the adjusted or original principal, ensuring a break-even or positive return. Gains on the principal and interest are exempt from state and local taxes.

Investing in Treasuries

Investors can purchase Treasuries in increments of $1,000 and make a maximum purchase of $10 million in non-competitive auctions. These low-risk investments have the flexibility to be held until or sold before maturity. Those bought through TreasuryDirect.gov can be sold before maturity as long as they are held for at least 45 days. As an added benefit, the interest income earned on Treasuries is subject to taxes only at the federal level.

Investors seeking low-risk diversification can purchase T-Bills and other Treasury securities from the government directly or through a financial planner. To get connected with a financial advisor in Tulsa to help you achieve your investment goals with agency bonds or state and local tax-exempt Treasuries, contact First State Investment Advisors at 918-492-1361.

Treasury Rates

As of December 21, 2022:

This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.