Treasury Securities

Treasury securities, also known as treasuries, are fixed-income assets issued by the United States Treasury Department. The government offers these debt instruments to raise funds necessary for government spending as an alternative technique to taxation. So, it helps the government to raise funds and finance its operations without levying taxes.

These securities are the safest investments owing to the backing of the United States government. Institutional investors find these financial instruments appealing as they carry a ‘AAA’ credit rating. Additionally, their high liquidity is another attractive feature for investors. There are different types of treasury securities, such as notes, bills, and bonds.

• The treasury securities definition refers to the fixed-income securities that the United States Department of the Treasury issues to raise funds required for government spending.
• There are four types of these debt instruments. They are treasury notes, bills, inflation-protected securities, and bonds. Among these, T-bonds have the longest maturity periods. Additionally, they provide the highest coupon rate.
• The interest rate on treasury securities is low. However, these fixed-income assets do not carry any credit risk as the United States Government backs them.
• The interest earned on these securities is not taxable at the local or state level.

The treasury securities definition refers to financial instruments offered by the U.S. Department of the Treasury. The most significant advantage of these fixed-income assets is that they are backed by the federal government’s full faith and credit. Although the interest rate on treasury securities is low, individuals are guaranteed to receive the principal and interest if they hold the assets until maturity.

That said, one must remember that these financial instruments carry some risk. These securities carry interest rate and inflation risks like all debt instruments. The interest rate risk is higher for securities having a long maturity period. When interest rates increase, bond prices plunge. On the other hand, when interest rates fall, bond prices surge.

Every kind of investor, in the market, for example, trusts, institutions, and individuals, may purchase such securities to achieve their investment objectives. Moreover, various investment funds utilize these financial instruments to meet fiduciary requirements besides fulfilling their goals. Moreover, individuals invest in these fixed-income assets owing to the zero default risk. Therefore, they can count on getting the principal amount and interest per the predetermined schedule.

Other nations are also eligible to buy these securities; it provides them with a portion of the U.S. debt. China, Japan, United Kingdom are some of the noteworthy countries holding treasury securities. The nations purchase these assets to fulfill different purposes. For instance, China buys the financial instruments offered by the U.S. Treasury Department to depress its currency’s value, making its exports less expensive for other nations.

The following are the different types of treasury securities:

#1 - Treasury Bonds

Also known as T-bonds, these debt instruments come with a maturity period of 20 or 30 years and offer the highest coupon rate among treasury securities. Holders of T-bonds receive interest payments twice a year. That said, one must remember that these securities are subject to volatility owing to interest rate fluctuation.

#2 - Treasury Notes

Treasury notes or T-notes have a maturity period of 2, 3, 5, 7, or 10 years. In addition, these securities offer coupon payments to investors semi-annually at a floating or fixed interest rate. The 10-year Treasury note is the most tracked debt instrument issued by the U.S. Government; experts use it to compute the yield curve’s slope, which is a crucial economic indicator.

#3 - Treasury Inflation-Protected Securities

Commonly referred to as TIPS, these securities have a term of 5, 10, or 30 years and are indexed to inflation, thus helping investors safeguard their wealth. Contrary to other treasury securities, the principal of these financial instruments may increase or decrease during the maturity period. Since the government makes coupon payments based on the adjusted principal, the interest also varies.

#4 - Treasury Bills

Treasury bills mature within a maximum duration of 12 months. Individuals purchase these securities for an amount lower than the listed face value. When the security matures, investors receive its face value. Generally, individuals hold these financial instruments till the maturity date. However, some holders may generate short-term gains by offloading the securities in the secondary market.

One can purchase the securities in the following two ways: 

#1 - Through A TreasuryDirect Account

Individuals with a TreasuryDirect account can participate in treasury auctions throughout the year. The government typically announces the auction date four or five business days before the auction day. Besides announcing the date, the government discloses all the required details, including issue and maturity dates, eligible participants, terms and conditions, deadlines for competitive and non-competitive bids, etc.

Non-competitive bids guarantee that the bidder can purchase the amount of security they desire at a price set by the competitive participating in the auction. Non-competitive bids come with a ceiling of $5 million. Usually, most individuals place non-competitive bids while institutional investors make competitive bids.

The U.S. Treasury Department reviews all the bids received on the auction date. Once the assessment is complete, investors receive the securities, and the Treasury gets the payment.

#2 - Via A Broker, Bank, Or Dealer

Individuals can also buy securities issued by the U.S. Government in the secondary market through brokers, banks, or dealers. When investors purchase the assets through a broker, they can hold them in an individual retirement account (IRA) or a tax-free retirement account. Buying through this route also makes it easier for individuals o sell the securities in the future. That said, individuals must remember that in the secondary market, they can buy older Treasury bonds compared to the new issues offered by the government on TreasuryDirect.

Let us look at a few treasury securities examples to understand the concept better.

Example #1

Although inflation has been quite persistent recently, a Bloomberg report suggests it was the tenth-slowest among 34 developed nations in the third quarter. In the market for treasury securities, the breakeven rates on 5-year treasury notes fell from a high of 2.56% in April 2022 to 2.17%. The breakeven rates on these T-notes measure what market participants expect the inflation rate to be over the debt securities’ life.

Example #2

In September 2022, BondBloxx Investment Management disclosed the launch of eight target-duration United States Treasury ETFs. These ETFs aim to provide investors with a cost-effective and precise way of getting exposure to treasury securities. All these funds track indices, including the United States Treasury Bonds’ duration-constrained subsets with over $300 billion outstanding.

The tax rules are the same for all kinds of debt instruments issued by the United States Treasury Department. The entire interest income received on T-bonds, T-bills, etc., is subject to federal income tax. However, the amount is exempt from local or state taxes.

Investors realizing profits or losses on treasury securities traded in the secondary market must report the short-or-long-term capital losses and gains. Every year, the U.S. Treasury Department sends Form 1099-INT to investors. The tax form shows the amount of interest they must report on Form 1040.

This article has been a guide to what are Treasury Securities. Here we explain how to buy them, their types, examples, and taxation. You may also find some useful articles here:

• Treasury Strips
• Treasury Inflation Protected Securities
• Treasury Bills vs Bonds