Treasuries refer to various investments offered by the U.S. Treasury Department, the part of the government that makes sure there's enough money for the entire government to keep operating.
The U. S. Treasury funds just about everything the U.S. does, including paying social security checks, giving emergency aid to citizens harmed by natural disasters, and paying the president's salary.
When the U.S. Treasury has more accounts payable (government salaries, maintenance of federal property, interest payments to foreign nations, food stamps and the rest of it) than accounts receivable (taxes, fees, tariffs and the sale of everything from postage stamps to dollar coins) it needs to borrow money, which it does by offering debt securities to the general public and the world. These debt securities issued by the U.S. Treasury are known as treasuries. The amount of money the government can borrow is called the debt limit.
How do Treasuries work?
Treasuries are debt securities, an umbrella term describing a number of ways of borrowing money from a lot of people at once. Bonds and mortgages are examples of debt securities. A security is some sort of instrument (a contract or a certificate) that "secures" the holder's interest in some underlying asset.
In the case of treasuries, the underlying "asset" is the future revenues of the U.S. Treasury (taxes, etc.). The holder is the buyer -- maybe you, maybe the Bank of China. By buying a treasury, you have signed a contract with the U.S. to lend it money in return for some interest along with the return of your principal at some defined future maturity date.
Treasuries due two years or longer pay interest every six months to the owner of the securities. The regular payment is called the coupon. On a 2-year treasury with a 0.25% interest rate, a note with a face value of $10,000 would pay out a coupon of $12.50 every six months.
Safety is a T-bill's middle name
Because investors have such supreme faith in the U.S. government to go on collecting enough tax revenue to pay its debt -- and because the U.S. dollar is the principal international reserve currency -- treasuries are considered one of the safest debts out there. They have a risk of default that's close to zero because they are implicitly backed by the full faith and credit of the U.S. government.
With a low risk of default comes a low return: The interest rate for treasuries is a benchmark for debt securities of similar maturities and issue dates. So if 2-year treasury bills are offered at a 0.25% interest rate, other municipal bonds and corporate bonds maturing two years from now will be offered at a slightly higher rate depending on the relative risk of those issuers defaulting.
As treasuries are both secure and predictable -- you know exactly when they will mature, or pay back the nominal value of the bond -- they are attractive for short-term savings or for savings for specific goals, such as:
- A down payment on a house
- College tuition, when college is only a few years away
- A portion of an investment portfolio that is guaranteed to hold its value over time
Bills, notes, bonds: It's all about time
Treasuries are sold in a variety of flavors, known as bills, notes and bonds, along with some related securities called TIPS (Treasury Inflation-Protected Securities) and savings bonds. The three main treasuries are delineated by their maturity dates, like this:
- Treasury bills: anything less than a year. Treasury bills, or T-bills, don't have coupons; they're sold at a discount to face value, and you'll receive the full face value at maturity.
- Treasury notes: maturities of 2, 3, 5, 7 and 10 years. Treasury notes pay coupons every six months.
- Treasury bonds: maturity of 30 years. Treasury bonds also pay coupons every six months.
Why would you buy a treasury bond with a maturity of 30 years, unless your retirement was 30-plus years away? While buying treasuries to hold until they mature is a common way to invest in the securities, you don't have to keep them that long. Treasuries can be bought and sold after their date of issuance (when the government first borrows the money to keep in business). The price of the treasury in the middle of its term will be based on some complicated math. Luckily, someone out there has already done the math for you; the market will dictate the price of any given type of bill and maturity date whenever you want to sell it.
This Guide to Money answer includes the topics: Invest.