Treasury securities

Also called Treasuries, T-bills, T-notes, T-bonds

Debt issued by the U.S. Treasury to fund the federal government, backed by the full faith and credit of the United States.

What it means

Treasury bills mature in a year or less and are sold at a discount, with the gain at maturity serving as interest. Treasury notes mature in 2 to 10 years and bonds in 20 or 30 years; both pay fixed interest every six months. The Treasury also issues TIPS and floating rate notes. They can be bought at auction directly from the government or through a brokerage, and sold before maturity on the secondary market.

Treasuries are considered to have very low default risk, but their market prices fall when interest rates rise, so selling early can mean a loss, especially for long maturities. Inflation can also erode fixed payments. Interest is subject to federal income tax but exempt from state and local income tax, which can matter in high-tax states.

Example

Suppose an investor buys a 26-week Treasury bill with a $1,000 face value for $980. At maturity they receive $1,000, so the $20 difference is their interest, about 2.04% of the purchase price for the six months.

How it’s used

Holding safe, short-term savings for a known expense
Providing stability in a stock-heavy portfolio
Earning interest free from state and local income tax

Strengths and weaknesses

Strengths

Very low default risk
Interest exempt from state and local income tax
Highly liquid market with many maturities

Weaknesses

Prices of longer maturities can drop when rates rise
Yields are often lower than riskier bonds
Fixed payments lose value to inflation

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.