Treasury Securities: A Survey of What’s Available

I’ve recently gotten interest in the possibility of investing in Treasury securities. Thus, I thought I’d start compiling information on the topic as I learn more about them. What follows is a quick survey of what’s available when it comes to investing in Treasury securities. Keep in mind that the TreasuryDirect website is a great resource on this topic, and contains far more information than I’ve been able to compile here.

Treasury Bills: Treasury bills (T-bills) are short-term government securities with maturities ranging from 28 days to 26 weeks. T-bills are a form of zero-coupon bonds, which means that you but them at a discount from their face value. After holding for a specified period of time, you then receive the face value — the difference between the purchase and redemption prices represents the interest that you earned. The interest on T-bills is state/local tax free, but the interest is federally taxable. Interest income is realized at the maturity date, so you pay tax in the year during which your T-bills mature. T-bills are auctioned weekly, and can be bought in multiples of $1000.

Treasury Notes: Treasury notes (T-notes) are government securities that have maturities of 2, 3, 5, and 10 years and earn a fixed interest rate every six months. The interest on T-notes is state/local tax free, but the interest is federally taxable. Two and five-year notes are auctioned every month, three-year notes are auctioned every quarter, and ten-year notes are auctioned eight times per year. T-notes can be purchased in multiples of $1000.

Treasury Infalation-Protected Securities (TIPS): TIPS are designed to provide protection against inflation, and have 5, 10, or 20 year maturities. The principal of a TIPS increases with inlation and decreases with deflation (as determined by the Consumer Price Index, or CPI). Interest on TIPS is paid (at a fixed rate) twice a year. However, since the interest is figured based on the adjusted principal, your interest payments can rise and fall.

When a TIPS matures, you receive the greater of the adjusted principal and the original principal. The increase in principal protects you against inflation, whereas the ‘floor’ on how much you get back protects you against deflation. Interest payments as well as increases in principal are federally taxable, but are exempt from state/local taxe Principal increases as well as interest payments are taxable during the year in which they occur, even if your security hasn’t matured. Five-year TIPS are auctioned in April and October, whereas te-year TIPS are auctioned in January, April, July, and October, and twenty-year TIPS are auctioned in January and July. TIPS can be purchaed in multiples of $1000.

Treasury Bonds: Treasury bonds (T-bonds) are government securities that have a 30 year maturity. T-bonds pay interest every six months until they mature, at which point you are paid it’s face value. Interest on T-bonds is free from state/local taxes, but is subject to federal income tax. T-bonds are offered four times per year (February, May, August, and November).

EE/E Savings Bonds: Series EE bonds are relatively safe, low-risk investment instruments. While older Series EE bonds earn a variable interest rate, those purchased after May 1, 2005 pay a fixed rate of return. Series EE bonds can be purchased online via TreasuryDirect in any amount (over $25) down to the penny. For paper certifications, you can buy Series EE bonds in $50, $75, $100, $200, $500, $1000, $5000, and $10,000 denominations.

You can redeem Series EE bonds after 12 months, although you’ll lose 3 months of interest if you do so before five years. You can hold and continue receiving interest on Series EE bonds for a maximum of 30 years. Interest on savings bonds exempt from state/local taxes, but subject to federal taxation. Because interest is paid when you cash in your bond(s), the federal tax hit is deferred until redemption or final maturity. Note that you may also be able to exclude all or part of these earnings from your federal taxes if you spend the proceeds on qualified educational expenses during the year in which you redeem your bond(s).

I Savings Bonds: Series I savings bonds (I-bonds) are a low-risk, liquid savings instrument that offer protection against inflation. The interest rate on I-bonds is a combination of two different rates: a fixed rate of return over the life of the bonds, and a variable, semi-annual inflation rate based on inflation. This latter rate is announced in May and November. When buying Series I bonds online via TreasuryDirect, you can purchase any amount (over $25) down to the penny. For paper certificates, you buy Series I bonds in denominations of $50, $75, $100, $200, $500, $1000, $5000, and $10,000. The earnings on I-bonds are state/local tax free, but are subject to federal income tax. As with Series EE bonds, you may be able to exclude all or part of your interest from federal income tax iuf you spend the proceeds on qualified higher education expenses during the year in which you redeem your bonds.

As you can see, one of the big advantages of Treasury securities is that they’re state and local tax-free. This is particularly attractive to me at this point, as we just moved from a state without an income tax to a state that has one. Thus, we can bump up our effective rate of return by dodging state income taxes.

Stay tuned for details on how to buy Treasury Securities.