Investing in treasury bonds is a popular pastime for investors globally. Below, we will take a look at what treasury bonds are exactly, the types available for investment, and factors investors should consider before purchasing treasuries.
What are treasury bonds?
Treasury bonds are government debt securities that the United States Federal government issues and US Treasury Department sell. They are also known as T-bonds by many investors, and they pay a fixed interest rate to investors every half a year until their maturity date, which is usually in two or three decades.
Market interest rate fluctuations, as well as the overall economic health and growth rate of the US affect the interest rate they pay out. For example, if the country is experiencing a time of recession or negative economic growth, interest rates will be lowered significantly as the government encourages loan borrowing and general spending. In this scenario, all newly-issued bonds will pay a lower rate of return.
Conversely, if the economy is flourishing, interest rates will likewise increase, thus positively affecting the rate of return in all newly-issued bonds, increasing them.
Types of treasuries
There are several types of trea犀利士
sury bonds. The biggest difference between them, from an investor’s perspective, would be their maturity dates. Treasury bills (also known as T-bills) are short-term bonds that have maturity dates from a few days up to a year, while treasury notes (also known as T-notes) have maturity dates with terms that span anywhere from two to ten years.
Both of these types pay a fixed interest rate of interest every six months until they reach their maturity date. The interest are exempt from state and local taxes but is subject to federal taxes.
How are treasuries bought and sold?
Treasury Department sells treasuries via online auctions. Investors can purchase notes online. And they can hold onto these bonds until maturity (in which case they would be paid back the original purchase price as well as interests incurred during their holding).
Investors can also sell the bond before it matures. This takes place in a secondary market – called the bond market.
Alternatively, many treasury bonds these days can be purchased through other investment vehicles. The most popular of these include mutual funds and Exchange-Traded Funds (ETFs).
Can non-US citizens buy treasuries?
While US government issues treasury bonds, investors around the world can buy them through Treasury Direct accounts. They can then purchase treasury bonds at auction without commission or fees.
Factors to consider before investing in treasuries
There are a few key factors to consider when you are certain you would like to invest in treasury bonds.
Firstly, you should consider the type of treasury bond you would like to invest in. As explained earlier, treasuries have different maturity dates. If you intend to hold a bond for their entire duration until maturity, you should consider your needs and trading goals first.
Next, you should take note of how much interest the bond pays and for how long you will tied up. This is important, as you would want to make sure you are on track in your investment goals in terms of profit, and you should never put all of your available cash in investments in case of emergencies.
Finally, you should consider how you would want to invest in treasuries – by purchasing individual bonds or a basket of securities such as a mutual fund or an ETF.
Conclusion
Treasury bonds are a relatively low-risk investment, thus tend to be quite popular with most demographics. They are also an excellent way of providing a steady income, which adds to their appeal as they can act as hedges against other open position in an investor’s portfolio.
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