In the world of “safe money” nothing compares to owning US Treasuries.
The reason is simple, there is never any financial risk investing in US Treasuries. None whatsoever, risk does not exist in this asset class.
So why even consider anything else for your “safe money?” Yield! These very safe instruments are also very low yielding instruments compared to commercially available products, such as Bank CDs or bonds.
US Treasuries are available is several different forms for investing. These are bills, notes and bonds. Many of these can be purchased directly from the US treasury under a new program called Treasury Direct.
Their website is www.treasurydirect.gov
An explanation of each available option for the benefits of owning US Treasuries is listed below.
US Treasury Bills
Treasury bills, or T-bills, are typically issued at a discount from the par amount. The amount of discount is in relationship to the yield offered by the US Treasury. When the bill matures, you would be paid its face value, $1,000. Your interest is the face value minus the purchase price. It is possible for a bill auction to result in a price equal to par, which means that Treasury will issue and redeem the securities at par value. It is also possible for the yield on T-Bills to be practically nothing which means the reason for even owning them is strictly based on safety, security and removal of all risk.
- Bills are sold at a discount. The discount rate is determined at auction.
- Bills pay interest only at maturity. The interest is equal to the face value minus the purchase price.
- Bills are sold in increments of $100. The minimum purchase is $100.
- You can hold a bill until it matures or sell it before it matures.
US Treasury Notes
Treasury notes, or T-notes, are issued in terms of 2, 3, 5, 7, and 10 years, and pay interest every six months until they mature.
The price of a note may be greater than, less than, or equal to the face value of the note based on the current interest climate. When a note matures the face value is paid.
Notes may be purchased directly from the US Treasury (Treasury Direct) and by banks, brokers, and dealers.
- The yield on a note is determined at auction.
- Notes are sold in increments of $100. The minimum purchase is $100.
- Notes are issued in electronic form.
- You can hold a note until it matures or sell it before it matures.
US Treasury Inflation Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal is adjusted by changes in the CPI… (Consumer Price Index). With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases.
At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation.
- TIPS are issued in terms of 5, 10, and 20 years. The interest rate on a TIPS is determined at auction based on current interest rates..
- TIPS are sold in increments of $100. The minimum purchase is $100.
- You can hold a TIPS until it matures or sell it in the secondary market before it matures.
US Treasury Bonds
Treasury bonds are issued in terms of 30 years and pays out interest every six months until they mature. When a Treasury bond matures, you are paid its face value.
The price and yield of a Treasury bond are determined at auction. The price may be greater than, less than, or equal to the face value of the bond.
Treasury bonds are sold by the US Treasury (Treasury Direct) and by banks, brokers, and dealers.
- The yield on a bond is determined at auction.
- Bonds are sold in increments of $100. The minimum purchase is $100.
- You can hold a Treasury bond until it matures or sell it before it matures.
If you own US Treasuries you may have a security that no longer pays interest. The US Treasury can provide you with information specific to your situation. They also offer a Treasury Hunt where you can look for any lost or forgotten assets issued by the US Treasury. Visit them at their website: www.treasury.gov.
US Treasuries are the ultimate “safe money” selection for your important money but they will also offer the lowest possible yield. Use them as a last option when considering your asset allocation.
So what is the risk when using US Treasuries as an investment vehicle? The danger is inflation, almost never have US Treasuries responded to the yields available elsewhere when inflation drives up interest rates.
Diversification is the key, before you decide how much to deposit in US Treasuries, make sure your asset allocation matches with your goals and what you wish to accomplish.