“Risk-Free” Investing: U.S. Treasury Bonds - dummies

“Risk-Free” Investing: U.S. Treasury Bonds

The U.S. Treasury issues lot of different kinds of debt securities. Savings bonds, which can be purchased for small amounts and come in certificate form (making for nice bar mitzvah and birthday gifts), are just one of many kinds of investment options.

When investment people speak of Treasuries, they usually are not talking about savings bonds. Rather, they’re talking about larger-denomination bonds known formerly as Treasury bills, Treasury notes, and Treasury bonds that are issued only in electronic (sometimes called book-entry) form.

All U.S. Treasury debt securities, whether a $50 savings bond or a $1,000 Treasury note, share four things in common:

  • Every bond, an IOU of sorts from Uncle Sam, is backed by the “full faith and credit” of the United States government and, therefore, is considered by most investors to be the safest bet around.

  • Because it is assumed that any principal you invest is absolutely safe, Treasury bonds, of whatever kind, tend to pay relatively modest rates of interest — lower than other comparable bonds, such as corporate bonds, that may put your principal at some risk.

  • Although the United States government is very unlikely to go bankrupt anytime soon, Treasury bonds are nonetheless still subject to other risks inherent in the bond market. Prices on Treasury bonds, especially those with long-term maturities, can swoop up and down like hungry hawks in response to such things as prevailing interest rates and investor confidence in the economy.

  • All interest on U.S. government bonds is off-limits to state and local tax authorities (just as the interest on most municipal bonds is off-limits to the Internal Revenue Service). But you do pay federal tax.

Beyond these four similarities, the differences among U.S. government debt securities are many and, in some cases, like night and day.