Treasury Bond (T-Bond)

What Is a Treasury Bond?

Treasury bonds (T-bonds) are debt obligations issued and backed by the full faith and credit of the U.S. government. They are essentially loans from citizens to the government whereupon interest is paid at normal intervals before the principal is eventually returned to the citizen upon the bond's maturity.
Since T-bonds are considered to have low credit or default risk, they generally offer lower yields relative to other bonds, like corporate or municipal bonds. The 30-year Treasury bond is the longest-maturity Treasury security. Its closest rival is the 10-year Treasury note.
Note: T-bonds and U.S. savings bonds are two completely different things.
The three main types of Treasury securities are T-bonds, T-notes, and T-bills. Every one of the three are traded in a highly liquid secondary market, known as the fixed-income market (all the more ordinarily known as the bond market). The term "fixed income" means that Treasury bonds deliver a fixed interest rate payout, paid to investors at regular intervals.
The interest paid on Treasury securities gives an almost guaranteed source of income. Nonetheless, the interest rate (or yield) on a 30-year T-bond is typically in a similar reach as the interest rate for a high-yield savings account even though the money in a high-yield savings account can be a lot more straightforward and speedier to access. A T-bond likewise is different from a money market account in view of the T-bond's significantly longer term.
Information about the purchase, redemption, replacement, and valuation of T-bonds and other Treasury securities is accessible at TreasuryDirect.gov, which is managed by the U.S. Bureau of the Fiscal Service.

Is a T-Bond a Good Investment?

T-bonds and related government securities are often purchased by investors seeking a safe haven, as many do during periods of volatility in the market. This can include investors who want an anchor for riskier investments in their portfolio and investors who are close to retirement and want to reduce the overall risk in their portfolio. T-bonds are less attractive during times of inflation as a result of their characteristically low interest rates and longer terms.

Where Can I Buy T-Bonds?

Treasury securities are accessible both through the U.S. Treasury and from private financial services firms.
To purchase directly from the Treasury, set up an account at TreasuryDirect.gov. Then you can bid at one of the consistently held auctions. The minimum purchase is $100 (even though T-bonds have a face value of $1,000).
Financial institutions, for example, banks or brokerage firms, each set their own minimum buy-in, so you might have to invest more than $100 at a time. Buying through a financial institution is an effective method for accessing a T-bond mutual fund or a T-bond ETF (exchange-traded fund).

How Do T-Bond Auctions Work?

T-bond auctions are held four times per year, on the first Wednesday of February, May, August, and November.
At the auction, there are two methods for placing a bid:

1. Non-Competitive Bidding: You consent to accept whatever (fixed) interest rate is chosen at the auction. In exchange, you're guaranteed to have your bid accepted, and you'll be paid face value assuming you hold the T-bond to maturity.
2. Competitive Bidding: You can determine the (fixed) interest rate you want to receive, but your bid might be accepted on the off chance that your predetermined rate is not exactly or equivalent to the rate set by the auction.

Where Can I Sell a T-Bond?

at least 45 days after your original purchase, you can sell a T-bond on the secondary market through a financial institution, for example, a bank or brokerage firm. Keep in mind that the bond's price can be discounted, par (what you paid for it), or set at a premium depending on the economic conditions when you decide to sell.

How Often Do T-Bonds Pay Interest?

T-bonds pay interest at regular intervals at the original (fixed) interest rate that was set at the time of purchase. For instance, assuming you purchase a $1,000 T-bond at 2 percent interest (likewise alluded to as a 2 percent coupon), you'll earn a $20 annual return from that T-bond. This translates into a $10 payment to you like clockwork.

Is T-Bond Interest Taxable?

As a general rule, you just pay federal tax on T-bond interest; the interest is exempt from state and neighborhood taxes. Notwithstanding, keep in mind that you might be taxed on any gains you earn over the original principal amount. The amount of interest you earn on your T-bond every year is reported on tax form 1099 or 1099-INT.

What Happens When a T-Bond Matures?

You can recover mature T-bonds at TreasuryDirect.gov for full face value. You can likewise recover through a financial institution, for example, a credit union or brokerage firm.

What Are the Different Types of U.S. Government Securities?

The three fundamental types of Treasury securities are Treasury bonds (T-bonds), Treasury notes (T-notes), and Treasury bills (T-bills). Technically, every one of the three types are bonds, but the federal government utilizes the term "Treasury bonds" for its 30-year instruments.
T-bonds have original maturities of either 20 or 30 years and typically offer the highest interest rates of the three essential securities. (The 20-year T-bond is not generally offered but can be purchased on the secondary market.) Interest payments are made twice per year.
T-notes have original maturities that reach from two to 10 years and furthermore pay interest twice per year. T-bills have the shortest time to maturity, with lengths ranging from four weeks to one year. T-bills are sold at a discount to the face value of the bond, so investors earn the difference at maturity (in a lump-sum interest payment).
Additional types of government securities include Treasury inflation-protected securities (TIPS), floating-rate notes (FRNs), and Separate Trading of Registered Interest and Principal of Securities (STRIPS).

What Determines the T-Bond Rate?

The T-bond rate, or yield, fluctuates with both overall market conditions and demand. The U.S. Treasury offers a wealth of information about both rates and yield bends for T-bonds, T-notes, and T-bills.

Is T-Bond Yield Used as a Benchmark?

The 10-year T-note (rather than the 30-year T-bond) is typically utilized as the U.S. benchmark, meaning that individuals hope to its yield as a proxy for all U.S. interest rates.

What Are the Pros of T-Bonds?

• Credit Quality: Treasury securities are backed by the U.S. government, so they're generally viewed as of the highest credit quality. In other words, the risk of default is extremely low.
• Tax Advantages: The interest you earn is subject to federal income taxes but not state or nearby income taxes. Be that as it may, you might need to pay taxes on principal gains.
• Liquidity: Investors can buy and sell Treasury securities both at routinely scheduled auctions and in the secondary market. The exact price relies upon the coupon rate compared with prevailing interest rates.

What Are the Cons of T-Bonds?

• Low Yield: You'll typically earn less interest on Treasuries compared with other, riskier investments.
• Tax Considerations: If you buy a bond at discount and either hold it until maturity or sell it at a profit, that principal gain will be subject to federal and state taxes.
• Interest Rate Risk: Keep in mind that as interest rates rise, the value of your existing bond holdings will fall. This is the actual quintessence of interest rate risk. Like all long-term bonds, T-bonds carry a significant risk that interest rates will rise during a given 30-year period.
• Inflation Risk: The interest earned on T-bonds may not keep pace with inflation, particularly north of a 30-year period.

Highlights

• Along with Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities (TIPS), Treasury bonds are one of four virtually risk-free government-issued securities.
• T-bonds pay semiannual interest payments until maturity, at which point the face value of the bond is paid to the owner.
• Treasury bonds (T-bonds) are fixed-rate U.S. government debt securities with a maturity range between 10 and 30 years.