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Many individuals buy U. S. Treasury obligations as part of their investment strategy for one reason - safety. However, there is more to Treasuries than just safety.
Benefits of Owning Treasuries
Safety - Obligations of the United States of America are considered to be the safest investment in the world.
Guarantee of principal - If you hold treasuries to maturity, the government guarantees to repay your principal. While you hold them, the market value may fluctuate with changes in interest rates, but at maturity, you can expect to get your principal.
Guarantee of return - Most Treasuries have a fixed rate of return and the government is obligated to make the timely payment of interest on their obligations.
Tax advantages - The interest on Treasuries is subject to federal income tax. However, the interest is not subject to state or local income taxation.
Liquidity - The market for Treasuries is immense. Billions, if not trillions, of dollars of Treasuries are traded by professionals on a daily basis. If you need to sell your Treasuries before maturity, there will be a market. However, the market value changes with changes in interest rates.
Types of Treasuries
Treasuries are usually described by their maturities:
Treasury Bills - Bills are sold with a minimum denomination of $10,000 and are available with three, six and twelve month maturities. The mechanics of how interest is "paid" is a bit complicated. If you buy them directly from the U. S. Treasury, you send a check for the full amount and shortly receive a check back representing a "discount." In essence, you are getting your interest at the time of purchase. On maturity, you receive the full par value. If you buy them in the open market, you buy them at a "discounted" price to their par value and receive the par value on maturity.
Treasury Notes - Notes are sold with maturities of 2, 3, 4, 5, 7 and 10 years and with a stated interest rate. The minimum investment is $5000 for the shorter maturities and $1000 for the maturities of 5 years or greater. Interest is paid twice a year.
Treasury Bonds - Bonds have the longest maturity, usually 10 to 30 years and are sold with a stated interest rate. The government has stopped issuing Bonds but previously issued Bonds are still actively traded in the market. The minimum investment is $1000. As with the other types of Treasuries, the government guarantees the timely payment of interest and principal on maturity. However, because of the long maturity, the market value of Treasury Bonds can fluctuate greatly with interest rate changes.
If you are looking for a secure place for some of the fixed income portion of your portfolio, Treasuries can definitely have a place. It is nice knowing they are backed by the full credit of the government.
You may want to consider choosing a Treasury maturity that matches when you are going to want or need the money. For example, if you are considering Treasuries as part of a college funding plan, select maturities that match the years when the child is going to college.
While long-term Treasury Bonds may offer a higher return than shorter-term Notes, remember that while you own the Bonds, you will be subject to interest rate risk. If interest rates rise, the value of your Bonds will fall. Most people end up wanting to sell Bonds before their 30-year maturity.
Treasuries are available from many sources. You can purchase Treasuries directly from the government, from banks, credit unions and brokerage firms. Be sure to ask about fees and other costs when discussing their purchase.