What are treasury bonds? Types and how to invest

When you’re planning an investment strategy, you may hear a lot about treasury bonds. These government-issued securities have long been a reliable option for those seeking low-risk investments. But what exactly are treasury bonds, how do they work, and how can you invest in treasury bonds? Let’s break it all down for you.

What is a treasury bond (T-bond)?

Treasury bonds, often referred to as T-bonds, are long-term debt securities issued by the U.S. Department of the Treasury. When you invest in a T-bond, you’re essentially lending money to the federal government in exchange for periodic interest payments and the return of your principal when the bond matures.

Here’s what defines treasury bonds:

• Issuer: U.S. Department of the Treasury
• Maturity period: 20 to 30 years
• Interest payments: Semi-annual
• Risk level: Low (backed by the U.S. government)
• Taxation: Exempt from state and local taxes, but subject to federal income tax

How do T-bond work?

Treasury bonds (T-bonds) function as a loan that you, as an investor, provide to the U.S. government. In return, the government promises two things:

1. Regular interest payments (Coupons): You receive fixed interest payments every six months.
2. Return of principal: At the end of the bond’s maturity period, the government repays the original amount you invested (the principal).

Here’s a step-by-step explanation:

1. Purchasing the bond

When you purchase a T-bond, you pay the principal amount, which is typically the bond’s face value. This is the money you are lending to the government. For instance:

• If you buy a $1,000 T-bond, this $1,000 is a loan to the U.S. government.

2. Earning interest

T-bonds come with a fixed coupon rate, which is the annual interest rate you’ll earn on the bond. Interest payments are made semiannually (every six months). For example:

• If the coupon rate is 4% and the bonds face value is $1,000, you’ll earn $40 in interest each year.
• Since payments are semiannual, you’ll receive $20 every six months until the bond matures.

3. Maturity and principal repayment

T-bonds have long maturities, typically 10, 20 or 30 years. When the bond reaches its maturity date:

• You’ll receive the original principal amount back in full.
• You’ll also receive your final interest payment.

For instance, if you hold a $1,000 bond for 10 years, at maturity, you’ll get back the $1,000 principal plus all the interest payments made during the bonds life.

4. Selling before maturity

If you need the money before the bond matures, you can sell your T-bond on the secondary market. The price you get may vary depending on current interest rates and market conditions:

• If market interest rates are higher than your bonds coupon rate, the bonds value may decrease.
• If market interest rates are lower than your bonds coupon rate, the bonds value may increase.

Types of treasury securities

T-bonds are just one kind of treasury security. The three types of treasury securities are based on the type of maturity:

• T-bonds or treasury bonds come with a maturity of 20 or 30 years and have the highest interest rates.
• T-notes or treasury notes have maturities of between two and 10 years and tend to have lower interest rates than T-bonds.
• T-bills or treasury bills have a maturity date of between four weeks and 1 year from when they are purchased. They are sold at a discount to the face value of the bond, which means that investors earn the rest at maturity.
• Treasury Inflation-Protected Securities (TIPS) have a maturity period between 5 to 30 years, and their interest is paid semi-annually.

Longer-term government securities tend to have higher interest rates than shorter-term bonds because there is generally more uncertainty for longer time frames what happens in five years is harder to forecast than what happens in five weeks. These long-term investments are used by some investors looking to save for retirement.

How are treasury bonds priced?

Treasury bonds are typically sold through auctions conducted by the U.S. Treasury. During these auctions, you can place:

• Competitive bids: Specify the yield you’re willing to accept. However, you may not win if your bid is too low.
• Non-competitive bids: Agree to accept the average yield determined at auction. This guarantees you’ll get the bond, regardless of the yield.

In the secondary market, T-bonds are priced based on prevailing interest rates. If interest rates rise, the price of existing bonds usually falls (and vice versa).

Why invest in treasury bonds?

Here are some reasons you might consider them before investing in treasury bonds:

1. Stability and security

Treasury bonds are considered one of the safest investments because they are backed by the “full faith and credit” of the U.S. government.

2. Predictable income

With a fixed interest rate and regular semi-annual payments, treasury bonds provide a predictable income stream, making them ideal if you’re seeking stability or planning for retirement.

3. Tax benefits

Interest earned on treasury bonds is exempt from state and local taxes, which can enhance your after-tax returns.

What to know before investing in treasury bonds

If you’re planning to invest in T-bonds, these tips might help:

• Understand your long-term financial goals and whether this low-risk investment will help serve those goals.
• If you do decide to buy T-bonds, decide whether you’d like to purchase through a broker on the secondary market, or through an online auction at the TreasuryDirect site.
• Consider ETFs as a low-cost way to invest in treasury bonds. Exchange-traded funds can help you invest in Treasury securities without the cost of buying bonds directly.

How to invest in treasury bonds

Investing in treasury bonds is straightforward and accessible. Here are a few ways you might go about it:

1. Through TreasuryDirect

TreasuryDirect is an online platform where you can purchase treasury bonds directly from the government without any intermediary. You might find this option convenient since it allows you to buy, hold, and redeem bonds electronically.

2. Through a broker

You can also buy treasury bonds through brokerage platforms. While this method may incur fees, it might offer more flexibility, such as the ability to trade your bonds on the secondary market if you need liquidity before maturity.

You can also buy treasury bonds through brokerage platforms like Public.com. While this method may incur fees, it might offer more flexibility, such as the ability to trade your bonds on the secondary market if you need liquidity before maturity. Public.com makes it easy for investors to explore bonds alongside other investment options in one platform.

3. Through bond funds

If you don’t want to manage individual bonds, you can invest in treasury bond funds or exchange-traded funds (ETFs). These funds pool together various treasury securities, offering diversification and easier management.

Read More: How to Buy Treasury Bonds As a Fixed Income Investment

Taxing T-bonds

Income earned from T-bonds is exempt from state and local taxes. You’ll only need to pay federal income taxes on interest payments from your T-bonds. Bondholders with Treasury bonds from the U.S. government can see the interest they’ve earned that year on their IRS Form 1099.

Meanwhile, taxes are the reason why these bonds are so reliable for investors. The government can use tax money to make sure that T-bond owners are paid back in full, making these investments essentially free of risk.

How to buy treasury bonds on Public.com?

1. Sign up for a brokerage account on Public

You can sign up for an account and explore thousands of corporate and government bonds on our bonds screener tool from the Trade tab. Select “Filter” to narrow your search results to United States Treasury bonds only.

2. Add funds to your Public account

Fund your Public account by linking a bank account or by depositing with a debit card.

3. Purchase whole or fractional bonds

Public is the only investing platform where you can purchase select fractional bonds for as little as $100. Just look for the “Fractional” tag.

4. Complete your Treasury bond purchase in a few taps

Once you’ve selected your bond, hit the “Trade” button to complete your purchase. If it’s a fractional bond, you can enter any dollar amount.

5. Manage your investments in one place

You can find your newly purchased Treasury bonds in your portfolio, alongside the rest of your stocks, options, crypto, and other assets.

Potential risks of investing in treasury bonds

While T-bonds are among the safest investments, theyre not entirely risk-free. Here are some risks to consider:

1. Interest rate risk

If interest rates rise, the value of your bond may decrease if you sell it before maturity. This is because newer bonds will offer higher yields, making older ones less appealing.

2. Inflation risk

Although treasury bonds provide fixed returns, inflation can erode the purchasing power of your interest payments and principal. You may consider Treasury Inflation-Protected Securities (TIPS) if this concerns you.

For those looking to invest in inflation-protected bonds, i-bonds maybe a great option. Learn more about how to buy i-bonds in our comprehensive guide

3. Opportunity cost

Because T-bonds offer lower returns compared to stocks and other investments, you may miss out on higher potential gains in a booming market.

The bottom line

Treasury bonds can provide a stable and secure investment option, particularly suitable for risk-averse investors seeking reliable income streams. Backed by the U.S. government, these long-term debt securities offer tax benefits and predictable semi-annual payments. While they come with minimal risks, they may be a solid part of a diversified portfolio. By understanding the mechanics and potential drawbacks, investors can assess whether T-bonds align with their financial objectives for 2024-25.

To learn more and take your first steps to start investing, download the Public app today! At Public, were serious about support and security. Our US-based, FINRA-licensed team is here when you need them, and your investments are protected with SIPC and FDIC coverage so you can confidently work toward your financial goals.

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