What Is A Treasury Bond? | Bankrate (2024)

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Diversification is a key strategy when it comes to investing, and one of the most common ways to diversify a portfolio is through bonds. As a form of government-issued debt, Treasury bonds can be a useful addition to a balanced investment portfolio, especially as you near retirement, offering stability, regular income and tax advantages.

“U.S. Treasurys have provided safe haven, diversification and reliable income to generations of investors during most of their 90-year history,” says Craig Bolanos, Jr., a founding partner and CEO of Wealth Management Group, LLC, in Inverness, Illinois.

Here’s what you need to know.

What is a Treasury bond?

Treasury bonds, often referred to as T-bonds, are long-term loans made to the U.S. government. When you buy a Treasury bond, you’re essentially lending money to the federal government. In return, the government agrees to pay you a fixed rate of interest every six months for the life of the bond.

When the bond matures — in 20 or 30 years — the government pays back the original amount of the loan, also known as the bond’s face value.

These bonds are issued by the Treasury Department, hence the name, and investors can purchase the securities directly at TreasuryDirect.com. You can also buy Treasury bonds through a bank or broker, but you may pay a fee or commission for doing so. However, some of the best online brokers no longer charge any fees or commissions on Treasury bonds. Charles Schwab and ETrade, for example, charge no fees on new issues or secondary trades on T-bonds.

Treasury bonds are widely considered a risk-free investment because the U.S. government has never defaulted on its debt. However, investors should understand that even U.S. government bonds have interest rate risk. That is, if market interest rates rise, the prices of these bonds will fall, as they did throughout 2022.

Types of Treasury securities

The U.S. Treasury offers several types of securities. Each has unique features and maturity periods that determine their interest rates and the way they’re traded.

  • T-bonds: These come with original maturities of either 20 or 30 years and typically offer the highest interest rate for investors. Interest payments are made twice a year.
  • T-notes: Original maturities for these securities range from two to 10 years and usually come with lower interest payments than a T-bond. T-note payments are also made twice a year.
  • T-bills: These securities have the shortest time to maturity, with lengths ranging from four weeks to one year. T-bills are sold at a discount to the face value of the bond, so investors earn the difference at maturity.

How do Treasury bonds work?

Treasury bonds come with maturities of 20 to 30 years. A 30-year Treasury holds a minimum face value amount of $1,000, although they can be bought in $100 increments if purchased directly from the U.S. Treasury.

The term “fixed income” means that Treasury bonds deliver a fixed interest rate payout, paid to investors twice annually, or every six months.

In addition to the semiannual interest rate payments, bondholders eventually get all of their investment principal back. When a Treasury bond matures – meaning it has reached its maturity date and expires – the investor is paid out the full face value of the bond. So if the bondholder holds a Treasury bond worth $10,000, he or she will receive the $10,000 principal back, as well as earning interest on the investment.

Treasury bonds are liquid, meaning they can be sold by bondholders before they mature. Treasury securities can be traded in a secondary market, also known as the fixed-income market, or more commonly, the bond market.

Of course, bondholders can also elect to hang on to the Treasury bond until the maturity date.

Treasury bond rates explained

Treasury bond interest rates (also known as yield) are tied to the specific bond’s maturity date.

The T-bond’s yield represents the return stemming from the bond, and is the interest rate the U.S. government pays to investors to borrow their money for a period of time. For instance, an investor who purchases a $10,000 T-bond and earns 4 percent in interest from Uncle Sam will earn a $400 annual return from the Treasury bond purchase.

So-called long-term Treasurys, which include the 30-year T-bond, typically offer the highest interest rate payments of any security in the U.S. Treasury fixed-income family.

“Typically, the longer the maturity date, the higher the interest rate,” says Jacob Dayan, partner at Consumer Law Group in Chicago.

The reason: Longer-term bonds are riskier, as a spike in inflation could reduce the value of the interest payments.

In addition, if market-driven yields move higher, pushing the price of the bond lower, it makes the lower-yielding bond you own a less attractive investment. (However, there are times when shorter-dated securities, such as a 3-month T-bill, can yield more than a 10-year note. This phenomenon, dubbed an inverted yield curve, occurred in 2023.)

As of March 2024, yields on 30-year U.S. Treasury bonds were around 4.37 percent.

T-bond tax implications

Tax-wise, Treasury bonds are fairly straightforward.

Any interest earned on a Treasury bond investment is tax-exempt at the state and local levels, but that interest is taxed by the federal government.

If you hold your Treasury bond with the U.S. government, the amount of interest you earned is easily viewable on your IRS Tax Form 1099. If it’s with your bank or broker, your financial institution can provide your taxable interest earned on your T-bond investment.

How Treasury bonds fit into your portfolio

You aren’t likely to get wealthy from investing in T-bonds alone. Returns are typically around 2 percent to 5 percent, and they require putting your money away for a long time.

However, investors can leverage T-bonds to preserve the wealth they’ve already created.

“There’s consistent income potential with Treasury bonds and your investment likely won’t decrease if the stock market tanks, like other investment vehicles can do,” says Chase Lawson, author of “Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth.”

Since T-bonds are some of the safest investments around, they can also help mitigate risk within your portfolio during economic downturns.

“For many investors, U.S. Treasury bonds are the investment of choice for flight to safety (trades) as evidenced most prominently during periods of extreme market volatility,” says Bolanos.

The difference between Treasury bonds and Treasury notes

Treasury bonds are part of a larger federal government family of Treasury securities, comprised of Treasury bonds, Treasury notes and Treasury bills.

“Treasury notes and Treasury bonds are essentially the same type of instrument and only differ in original maturities,” explains Robert Johnson, professor of finance at the Heider College of Business at Creighton University.

The government issues Treasury bonds in 20-to-30-year maturities and it issues Treasury notes in maturities ranging as short as two years to as long as 10 years. Both purchasers of Treasury bonds and notes receive an interest payment every six months.

Treasury bills (T-bills), the short-term debt of the government, differ from both Treasury bonds and Treasury notes.

“T-bills are issued with original maturities of four, eight, 13, 26, and 52 weeks,” Johnson says. “They don’t pay interest and are issued on a discount basis (which means your initial cost is lower than the face value of the T-bill). With T-bills, the investor receives a higher amount when the bill matures than they paid to acquire it.”

Tips for investing in Treasury bonds

Here are a few easy ways to buy Treasurys:

  1. Buy direct. If possible, it’s preferable to buy Treasury bonds directly at TreasuryDirect.gov. That way, you’re buying your bonds from the federal government and eliminating the fees that come with buying bonds through a middleman, as you would with a brokerage firm.
  2. Buy closer to retirement. Wealth is more about capital appreciation during the savings and investing years and capital preservation during your later years — and with good reason. When you’re young, investing in higher-risk, but higher-reward stocks generates capital appreciation. In short, you’re creating long-term wealth with your stock investments. However, when you’re either nearing or already in retirement, you want to preserve the wealth you’ve created. You can accomplish that via capital preservation tools like T-bonds, which represent lower-risk investments that reduce your odds of losing money in a market downturn.
  3. Go the ETF route. An effective, low-cost way to get in on the Treasury bond game is to invest in Treasury ETFs, or exchange traded funds. Any low-cost, diversified Treasury-oriented ETF that emphasizes a long-term T-bond component is worth looking at. You can even mix and match different Treasury security funds. You can consult Bankrate’s list of top bond funds for retirement investing if you’re looking for inspiration.

If you’re looking for ETFs that invest in long-term Treasurys, have a look at iShares 20+ Year Treasury Bond ETF (TLT) and Vanguard Long-Term Treasury ETF (VGLT).

Bottom line

Treasury bonds can be an effective way to diversify your portfolio or preserve capital. They offer a fixed interest rate and are backed by the U.S. government, making them a low-risk investment. While they may not yield the highest returns compared to riskier investments, they can provide stability to your portfolio, particularly during times of market volatility. However, it’s essential to consider your financial goals. T-bonds can be an effective way to protect your wealth, but they aren’t necessarily a great way to build wealth.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

What Is A Treasury Bond? | Bankrate (2024)

FAQs

What Is A Treasury Bond? | Bankrate? ›

Treasury bonds, often referred to as T-bonds, are long-term loans made to the U.S. government. When you buy a Treasury bond, you're essentially lending money to the federal government. In return, the government agrees to pay you a fixed rate of interest every six months for the life of the bond.

What is Treasury bonds in simple words? ›

What are treasury bonds? Treasury bonds are debt securities issued by the government. Essentially, you're loaning money to the government by purchasing a bond at a predetermined interest rate. In turn, the government will pay you a fixed interest rate for a set duration of time.

What is a Treasury bond quizlet? ›

A Treasury bond (T-Bond) is a marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually, and the income received is only taxed at the federal level.

What is a Treasury bond for dummies? ›

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.

What do Treasury bonds tell us? ›

Treasury yields also show how investors assess the economy's prospects. The higher the yields on long-term U.S. Treasuries, the more confidence investors have in the economic outlook. But high long-term yields can also be a signal of rising inflation expectations.

How do Treasury bonds pay you? ›

Once you buy T-bonds, you get a fixed-interest payment called the coupon every six months. The coupon amount is given as a percentage of the bond's face value. For example, a bond worth $500 with a coupon rate of 5% would pay $25 in interest each year.

How much do 1 year Treasury bonds pay? ›

1 Year Treasury Rate is at 5.12%, compared to 5.16% the previous market day and 4.59% last year. This is higher than the long term average of 2.95%. The 1 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 1 year.

Why are Treasury bonds? ›

U.S. Treasury bonds are long-term debt securities. Treasury bonds mature in 20 or 30 years and pay interest every six months. When you purchase a Treasury bond, you are loaning money to the U.S. federal government. Treasury bonds are a low-risk investment that pays a fixed return and offers tax advantages.

What is a Treasury bill quizlet? ›

Treasury Bills are short-term obligations, unlike most other debt securities, are issued at a discount from par. Rather than making regular cash interest payments, the return on a T-Bill is the difference between the price the investor pays and the par value received when the bill matures.

Is a Treasury bond money? ›

Treasury bonds are one form of government debt. The US Department of the Treasury borrows from the investing public through bonds that are repaid with a set interest rate, usually over a longer period.

Should I put my money in Treasury bonds? ›

While Treasury bonds don't have a serious risk that the government won't pay you back, they do have two other risks that are typical of bonds: inflation risk and interest rate risk. While Treasury bonds are relatively safe investments, one key risk is that inflation will erode your returns over the years.

What is the safest investment with the highest return? ›

Overview: Best low-risk investments in 2024
  1. High-yield savings accounts. ...
  2. Money market funds. ...
  3. Short-term certificates of deposit. ...
  4. Series I savings bonds. ...
  5. Treasury bills, notes, bonds and TIPS. ...
  6. Corporate bonds. ...
  7. Dividend-paying stocks. ...
  8. Preferred stocks.
Apr 1, 2024

What is one downside to investing in treasuries? ›

But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered. If you're interested in investing in Treasury bonds or have other questions about your portfolio, consider speaking with a financial advisor.

How much is a $100 savings bond worth after 20 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount20-Year Value (Purchased May 2000)
$50 Bond$100$109.52
$100 Bond$200$219.04
$500 Bond$400$547.60
$1,000 Bond$800$1,095.20

How often do Treasury bonds pay interest? ›

Bonds are long-term securities that mature in 20 or 30 years. Notes are relatively short or medium-term securities that mature in 2, 3, 5, 7, or 10 years. Both bonds and notes pay interest every six months.

What's the difference between Treasury bills and Treasury bonds? ›

Key takeaways. Treasury bills have short-term maturities and pay interest at maturity. Treasury notes have mid-range maturities and pay interest every 6 months. Treasury bonds have long maturities and pay interest every 6 months.

What are the pros and cons of Treasury bonds? ›

Investing in Treasury bonds has its advantages, such as low risk, stable income, and tax benefits, but it also comes with disadvantages, such as low returns, inflation risk, and interest rate risk.

How much is a $100 savings bond worth after 30 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount30-Year Value (Purchased May 1990)
$50 Bond$100$207.36
$100 Bond$200$414.72
$500 Bond$400$1,036.80
$1,000 Bond$800$2,073.60

Why would you buy a Treasury bond? ›

Treasury bonds are a good investment with the highest credit quality. They have tax advantages and are generally low risk. They earn interest until their maturity date, so they're good for earning steady cashflow.

Are Treasury bonds good or bad? ›

While Treasury bonds don't have a serious risk that the government won't pay you back, they do have two other risks that are typical of bonds: inflation risk and interest rate risk. While Treasury bonds are relatively safe investments, one key risk is that inflation will erode your returns over the years.

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