Why Buy US Treasury Bonds?

The U.S. Treasury sells bonds through a weekly auction process.

The term Treasury bonds is commonly used to denote all types of debt securities issued by the U.S. Treasury. Treasury bonds are often compared to bank savings products such as money market accounts and certificates of deposit -- CDs. Investors turn to Treasury securities when they want to avoid investment types with higher levels of risk and possibility of loss.

Range of Securities

Treasury securities are offered in several types and a wide range of maturities. Treasury bills are short-term instruments with maturities of four to 52 weeks. Bills are sold at a discount and interest is earned when the face amount is received at maturity. Treasury notes have maturities at issue of two to 10 years and Treasury bonds mature in 30 years. Notes and bonds pay a fixed rate of interest in semi-annual interest payments. Treasury inflation-protected securities -- TIPS -- have maturities of five, 10 or 30 years. TIPS also pay interest twice a year.

Safety

All types of Treasury securities are backed by the full taxing power of the U.S. government. Treasury bonds are considered to be the safest marketable security investment. The market price of Treasury bonds will fluctuate, but investors can always elect to keep any Treasury bond until maturity to receive the full face amount.

Tax Advantages

Interest from Treasury securities is taxable at the federal level and tax exempt for state income taxes. For investors in high income tax states, the state tax exemption boosts the taxable equivalent yield. If an investor has a 10 percent marginal state income tax bracket and earns 4 percent from a Treasury bond, the yield is equivalent to 4.44 percent from another investment that pays interest taxable at the state level.

Inflation Protection

Treasury inflation-protected securities -- TIPS -- are Treasury bonds that increase in value with the inflation rate. The face value of a TIPS bond is adjusted every month with the change in the consumer price index -- CPI. The interest paid on a TIPS bond is based on the current face amount, so the interest payments will also increase as the value of a TIPS bond increases.

Capital Gains

As marketable securities, Treasury bonds give investors an opportunity to earn capital gains if the market value of a Treasury bond increases. Bond values are affected by changes in interest rates. If interest rates decline, the market price of a Treasury bond will increase. In a falling rate environment, investors can earn significant profits investing in long-term Treasury securities. On the flip side, rising rates will cause bond prices to fall. Investors should stick to shorter-term Treasury bonds in a rising rate environment.

References

• TreasuryDirect: Treasury Securities and Programs
• Modern Medicine: Treasuries: Pros and Cons