How to Own a Piece of the US Government’s Debt

With the instability of the market – predicted to last for at least another few months, but more likely longer – more and more people are turning to Treasury securities to protect their money.  While T-bills, notes, bonds, and the newer TIPS (Treasury Inflation-Protected Securities) carry low interest rates relative to the market, they are good options if you are looking to preserve rather than increase your wealth.

Treasury bills, notes, and bonds generally work the same way, and are classified according to their maturity (the time it takes for the principal to return to the owner without any penalties): T-bills are short-term securities, with a maturity of up to 52 weeks, Treasury notes have maturities between 2 and 10 years, and Bonds mature in 30 years.  Unless there are expectations of deflation, T-bills are sold below face value, and at maturity you can redeem them for the face value (the interest you earn being the difference between the two).  Treasury notes and bills are similar, but also pay interest – fixed at the time of purchase, based on the face value of the security – to holders every six months.

First issued in 1997, TIPS have maturities of 5, 10, and 20 years and pay interest every six months.  But the difference between it and Treasury notes and bills is important – designed to protect investors against inflation, the TIPS interest rate is pegged to the Consumer Price Index (CPI – a standard measure of inflation).  The principal value of the TIPS will fluctuate according to hikes and dips in inflation, and the interest rate will vary accordingly.  At maturity, however, the principal returned will be at least the value determined at time of purchase, even if it goes through deflation.  So while the interest rate on TIPS is frequently lower than that found in Treasury notes and bills, investors are able to take advantage of increases in inflation and still be assured that they will, at a minimum, get a fixed principal back.

If you are interested in buying any of these Treasury securities, you can go through a financial institution or a broker, invest in a conservative fund that includes notes or bonds, or buy directly from the US Treasury through TreasuryDirect.  As all of the securities are issued through auctions scheduled throughout the year, if you use a broker, you may be able to determine the rate and amount of securities you get.  But TreasuryDirect may be a good option for smaller investors, as it requires a minimum purchase of only $100, and while you do not get to participate in the auction directly, you can still set the value under which and the interest rate over which you are willing to purchase the auctioned securities.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: