Treasury Investments - What Are My Options?

Treasury investments are arguably the safest investments in the world simply because these have been issued as debt instruments by the United States federal government. To be more specific, these are issued by the US Department of the Treasury through the Bureau of Public Debt. Even with the recent downgrade by one notch (AAA to AA-plus) by Standard & Poor's and the Great Recession, the US is still seen as a global economic force willing and able to pay off its debts to creditors both in and outside of the country.

Indeed, you should have no hesitation in looking at marketable treasury securities as both long-term and short-term investments. It must be noted that these Treasury investments are highly liquid and heavily traded in the secondary market, thus, upping their desirability factor.

Treasury Bills

Treasury bills are short-term investments since their maturity dates range from 28 to 364 days. Keep in mind that T-bills do not pay the interest amounts due before their maturity periods have expired. Instead, these are sold at a discount of their par value, thus, creating a positive yield to their maturity. For example, a Treasury bill with a par value of $1,000 can be sold for $980 - a discount.

Because of these two factors, Treasury bills are considered to be the safest marketable Treasury investments available for US investors.

Treasury Notes

Treasury notes have longer maturity periods from 1 to 10 years and issued in denominations of $1,000. Interest payments are made every 6 months regardless of the maturity period although it must also be emphasized that Treasury notes are also purchased at par to yield positive values at maturity.

Let's take an example to illustrate the point. You will purchase a $1,000 T-note with a maturity period of 10 years and interest of 3%. You will then receive a total of $30 interest yearly and then cash in the T-note for $1,000 at the end of 10 years. Your $950 will then yield $1,300 in 10 years. Yes, T-notes are low-risk, low-yield Treasury investments but you have the assurance of being paid at the end of the maturity period.

Treasury Bonds

Treasury bonds have the longest maturity periods from 20 to 30 years with interest payments every 6 months. These marketable treasury securities are also issued in a minimum denomination of $1,000. Any income that accrues to the holder of the Treasury bonds is only taxed at the federal level.

You can purchase Treasury bonds in the secondary market such as through banks. Take note that these marketable securities have already been auctioned with the maximum purchase amount being $5 million for a non-competitive bid.

Treasury Inflation-Protected Securities

Also known as TIPS, these treasury marketable securities are the government's inflation-indexed bonds. Their principal amounts are indexed to the Consumer Price Index (CPI), which is the most commonly used measure of inflation.

Thus, you will observe that when the CPI rises, the TIPS' principal also rises and conversely for when the CPI falls. Take note that the interest rate on the coupon is constant but the amount of actual interest paid will differ when it is multiplied with the adjusted principal.

When you have considered all your options in these four types of Treasury investments, you can then choose which one falls into your investment plans.