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A Crash Course in Treasury Securities

A Crash Course in Treasury Securities Fitzwilliams Financial

Ever wondered what treasury securities are? What about the difference between a treasury note, a treasury bond, and a treasury bill? Let’s uncover what these securities are so that you can have a sense of how they function and how they work for an investor.

What Are Treasury Securities Used For?

Treasury securities are basically debt products used to pay for public projects such as building schools and highways.[1] Treasury securities function similarly to loans–you loan the government some amount of money, and the government promises to pay back that money and some additional money (an interest rate).[1]

Interest rates are the main reason why people purchase bonds because interest rates are a form of financial return. But let’s discuss more on how treasury securities really work.

The Inner Workings of a Treasury Security

These securities have what is called “face values” or “par values.” Both of these terms mean the same thing. They are the amount the government guarantees to the owner of the bond at the maturity date.[1] So, for example, if you have a bond with a face value of $50, that bond will be worth at least $50 at the time of maturity. Think of it as a floor price. If you purchased that bond at $100 and tried to sell it, it couldn’t be sold for less than $50.

In addition, because the US Government backs these kinds of securities, they are commonly considered relatively safe investment options.[2] The US has never defaulted (been unable to pay) its Treasury security debts, so many have confidence that if they own a US treasury bond, they will get the amount listed on the face value if they wait until the bond is mature.[2]

Treasuries as an Investment

So, given that these kinds of investments carry relatively little risk, why doesn’t everyone just invest in these kinds of securities? The answer is that these kinds of investments often yield lower returns than more high-risk options.[2] So you’ll have to consider that if you are interested in investing in these kinds of securities, they don’t fit every portfolio or financial situation.

The Three Treasury Securities

There are three types of Treasury securities, and their main difference is their maturation length (though there are other differences between them as well, such as interest rate levels):

  1. Treasury bonds (sometimes called T-Bonds) mature after 20 or 30 years
  2. Treasury notes (sometimes called T-notes) have maturation periods of 2, 3, 5, 7, or 10 years
  3. Treasury bills (sometimes called T-bills) have a maturation period of anything less than 2 years [2]

When it comes to portfolio design, there are many, many options to consider, both high-risk and low-risk and long-term and short-term. And all of these options come with different considerations and are impacted by different financial factors.

If you are looking for someone to help guide you through the myriad of options available to you for investment, consider reaching out to one of our professionals for a complimentary review of your financial situation.

 

This article is intended for educational purposes only and is not intended to serve as the basis for any purchasing decision.

When consumer confidence hits a multi-decade low, it is completely natural for you to feel a sense of hesitation about your hard-earned savings. If you are approaching retirement, seeing prices rise while trying to figure out the right time to adjust your portfolio can feel incredibly stressful. However, this low confidence might actually be introducing a healthy dose of critical thinking into the market right now. Instead of rushing into investments out of a fear of missing out, I am seeing people take their time to analyze their moves before they act.

This deliberate pace could be a vital asset as we prepare for what might be a historic three trillion dollar wave of tech IPOs. The names hitting the market are incredibly popular, and the media hype may make you feel like you need to change your entire strategy to get a piece of the action. But we must look closely at the underlying reality: many of these massive firms are not yet profitable. The typical corporate fundamentals simply are not there yet.

Because of this, I believe you should treat these speculative assets with extreme caution, much like money you would take to Vegas. If you want to participate, you might consider limiting that exposure to no more than five percent of a well-diversified portfolio. You should never dismantle a carefully crafted, long-term retirement plan just to follow a market trend. Furthermore, you must realize that extreme trading volumes during these public launches could cause your orders to execute at vastly different prices than you originally intended. It pays to be patient and let the dust settle.

If you have questions about how these shifting market dynamics might apply to your personal retirement plan, our team is always here to help.

Key Takeaways

  • A drop in consumer confidence may encourage a healthier investment environment by forcing individuals to rely on critical thinking instead of emotion.
  • An upcoming wave of massive technology IPOs might generate significant media hype, but these companies may lack current profitability and traditional business fundamentals.
  • Investors should avoid allocating more than five percent of a diversified portfolio to highly speculative, unproven market assets.
  • Heavy trading volume during a major public offering could cause investment orders to execute differently than an investor expects.

Fitzwilliams Wealth Management, Inc. is an SEC registered investment adviser. FWM and Fitzwilliams Financial are affiliated companies. This content is for informational purposes only and should not be construed as personalized investment advice. We do not provide tax or legal advice. Investing involves risk. Media appearances are for informational purposes only and do not constitute an endorsement.
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