U.S. Treasury securities—such as bills, notes and bonds—are debt obligations of the U.S. government. When you buy a Treasury security, you are lending money to the federal government for a specified period of time.
Because these debt obligations are backed by the “full faith and credit” of the government, and thus by its ability to raise tax revenues and print currency, U.S. Treasury securities are considered the safest of all investments. They are viewed in the market as having no “credit risk,” meaning that it is virtually certain your interest and principal will be paid on time.
Because of this unique degree of safety, interest rates are generally lower than for other widely traded debt, such as corporate bonds.
The amount of marketable U.S. Treasury securities is huge, with $3.6 trillion in outstanding bills, notes and bonds as of December 31, 2003. The Treasury market is the most liquid debt market, meaning it is the one where pricing and trading is more efficient. Trading in U.S. Treasury securities occurs virtually 24 hours a day all over the world. In 2003, the U.S. Treasury estimated that 11% of bills, notes and bonds were held by individuals, 11% by banks and mutual funds, 6% by pension funds, 36% by foreign interests, 9% by state and local governments and 28% by other investors.
The Role of Treasury Securities in an Investment Portfolio
The primary advantage of Treasury securities is safety. No other investment carries as strong a guarantee that interest and principal will be paid on time. Because these payments are predictable, many people invest in them to preserve and increase their capital and to receive a dependable income stream—to help meet living expenses during retirement, for example, or to fund specific objectives, such as paying for a college education.
The benefit of predictability is enhanced by the fact that Treasuries generally do not have “call” provision. In fact, the Treasury has not issued “callable” securities since 1985. Call provisions, common in municipal and corporate bonds, permit the issuer to pay off the bond in full before its scheduled maturity. This is especially likely to happen when interest rates decline; the issuer will refinance its debt to obtain the lower prevailing interest rate, just as home owners refinance mortgages. When that happens, the investor would be forced to pay more to earn the same interest rate. If you own Treasuries that have no call provisions, you know exactly how long your income stream will last.
Another advantage of Treasuries is that they are available with a wide range of maturity dates. This allows an investor to structure a portfolio to specific time horizons.
Because they are the safest investments available, Treasury securities pay somewhat lower interest rates than other taxable fixed-income investments. Many investors accept this as a trade-off for security. In a diversified portfolio, Treasury securities usually represent money that investors want to keep safe from risk.
An added benefit of Treasury securities is that their interest payments are exempt from state and local income taxes (but not federal taxes). This has the effect of increasing the after-tax benefits of these investments. Investors in high-tax states should take special note of this benefit.
Another important characteristic of the Treasury market is its high level of liquidity, which means that Treasuries are easy to buy and sell. Because they trade so frequently in large volume, the spreads between what a dealer would be willing to pay and what a dealer would be willing to sell for is lower than for other securities.
Market Risk and Treasury Securities
Although Treasuries are considered free from credit risk, they are affected by other types of risk, principally interest-rate risk and inflation risk. While investors are effectively guaranteed to receive interest and principal as promised, the underlying value of the bond itself may change depending on the direction of interest rates.
As with all fixed-income securities, if interest rates in general rise after a Treasury security is issued, the value of the issued security will fall, since bonds paying higher rates will come into the market. Similarly, if interest rates fall, the value of the older, higher-paying bond will rise in comparison with new issues.
Corporations with Treasury Securities Enjoy a securities loan Funding within five(5) business days.