What Are Treasury Securities and Why Invest in Them

Guide to Investing in Treasury Securities

By: Jon Boyd Barrett

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If you are looking for a way to keep your savings safe, you may want to protect your money with treasury securitiesYou would be hard pressed to find a safer option than U.S. government issued treasury securities, as these are fully backed by the U.S. government, making them an increasingly attractive investment option during economically fragile times.
There are four main types of treasury securities that you can buy: treasury bonds, treasury bills, treasury notes, and treasury inflation protected securities. This article will tell you what the differences are, and how to begin investing:

What Are Treasury Securities?

The U.S. government issues treasury securities as a means for covering the costs of government debts. By investing in treasury securities, investors are effectively loaning money to the government for a pre-determined amount of time, depending on what type of treasury security is purchased. When that time is up, the government repays the investor the full principal amount plus the interest earned. The interest is at a fixed rate that is set before the treasury security is initially sold.

The Different Types of Treasury Securities

Treasury Bonds are 30 year bonds that pay interest every 6 months. Minimum purchase is $100.

For short-term securities, you can purchase Treasury Bills. These are sold at a discount from their face value. Upon reaching maturity (anywhere from a few days up to 52 weeks), the face value is paid to you. These are great if you don’t want to tie up your money for long periods, although they tend to earn less. Minimum purchase is $100.

Treasury Notes can be bought from anywhere between $1000 and $5000. They have maturities from 2 to 10 years. Interest is paid every 6 months. Minimum purchase $100.

Treasury Inflation Protected Securities (TIPS) have a 10 year maturity and are set at a fixed interest rate. The big difference is that the principal increases along with the rate of inflation, and therefore, increases future interest payments. The benefit is that these will hedge against inflation. Minimum purchase $100.

I Savings Bonds are based on the same inflation-indexed concept. The difference here being that you can purchase them for as little as $50. Minimum purchase $50, with $5000 being the maximum.

EE/E Savings Bonds pay interest based on current market rates for up to 30 years. Minimum purchase $25 and a maximum of $5000 per year.

The Benefits of Treasury Securities

Treasury securities are an extremely low risk and safe investment because they are backed by the U.S. government and have always been repaid.
Principal payment and interest are guaranteed to be paid on time.
Most treasury securities have low liquidity risk and can easily be sold for cash.
Buying treasury securities is easy. They can be bought online, direct from the government. No brokers required.
Another benefit of treasury securities is that Interest gained is only subject to federal income tax, not local or state taxes.

Disadvantages of Treasury Securities

Interest rates are low in comparison to other investments. As the interest rate will generally be lower than the rate of inflation, your treasury security could actually lose value over time. Some reports show that the average return since 1926 has been 3.77 percent.
Should you need to sell the your treasury security before it matures, you might get less than face value.
It is theoretical that should the dollar collapse and the government go bankrupt, your treasury securities would be nulled. Of course, nothing like this has ever happened, but if this is a possible scenario that you are worried about, then you may better off investing in gold, silver, and other commodities.

How to Buy Treasury Securities
You can begin investing in treasury securities by buying them thorough banks or brokers. However, by far the most convenient way is to go directly through the US treasury department. It is easy and you will not have to pay any commissions or brokerage fees. The treasury department sells the securities through the government website, Treasurydirect.Gov.

Step by Step Guide to Buying on TreasuryDirect.Gov

Step 1: Once on the website, create an account. You will need a social security number, valid drivers license or state id number, bank account with routing numbers, and an email address.
Note - When purchases are made, the funding will come directly from your linked bank account.

Step 2: Verify your new account via email. You will then be mailed an access card within 2 weeks. Once you receive that, you will be able to log into your new account and start buying treasury securities.

Step 3: You are logged into your account and ready to buy. Search through the different treasury securities that are available. Be sure to compare current interest rates with the interest rates and values of the treasury securities that are offered. If you have an idea of what you are looking for, you can use the “purchase express” option. Here, you specify the security type that you are after, along with the dollar amount you want to spend. Click the search button, and all matching available treasury securities will show.
Note - All auctions will only allow non-competitive bidding, meaning that the interest rates or discount values are pre-determined, and the buyer agrees to buy treasury securities on those terms.

Step 4: Bid on the treasury security that you want, and then complete the purchase.

Step 5: Once you have purchased a treasury security, you can monitor it through your TreasuryDirect.gov account. When interest payments are due, they will be deposited directly into your bank account, and when your treasury security matures, you can have the principal payment transferred to your bank account, or rolled into a new treasury security.

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