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Investment types

U.S. Treasury securities

U.S. Treasury securities are direct debt obligations backed by the full faith and credit of the U.S. government. Interest can be paid at maturity or semiannually depending on the type of security. Treasuries usually are issued in $1,000 denominations.

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Investment types

Bonds

Fixed income

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US treasury bonds

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Treasury securities are a popular investment option for many individuals due to their reputation as one of the safest investments available. This is because these securities are backed by the full faith and credit of the U.S. government, making them a low-risk option for investors. There are 3 common types of Treasury securities—bonds, notes, and bills—each with different maturity dates and interest rates.

Key takeaways:

Treasury securities are considered one of the safest investments because they are backed by the U.S. government.
They're issued in different maturities, ranging from a few days to 30 years, allowing investors to choose the term that best fits their investment goals.
Treasury securities are usually sold at auction, and their prices are determined by market demand.
They offer a fixed rate of return, making them a stable investment option.
Interest earned from Treasury securities is exempt from state and local taxes.
They can be bought and sold easily in the secondary market, providing investors with liquidity.
Treasury securities are used as a benchmark for other interest rates, making them an important indicator of the overall economy.

What's a Treasury security?

Treasury securities refer to debt instruments issued by the United States Department of the Treasury to finance the government's spending needs. These securities are considered to be one of the safest and most liquid investments in the world and are backed by the full faith and credit of the U.S. government.

The primary role of Treasury securities is to allow the government to borrow money from investors to fund its operations and pay for its expenses, such as social programs, military spending, and infrastructure projects. Treasury securities are also used as a tool for the Federal Reserve to implement monetary policy by buying or selling them in the open market.

Investors are likely to receive Treasury securities' principal and interest payments on time due to the securities' low-risk nature.

THE INVESTMENT YOU CHOOSE SHOULD DEPEND ON YOUR GOALS AND INVESTING STYLE

Types of U.S. Treasury securities

Treasury bills (T-bills)

Treasury bills, or T-bills, are issued with maturities of 52 weeks or less. They're issued at a discount and redeemed at face value, making them a low-risk investment option. The difference is calculated as the taxable interest income.

T-bills are short-term government bonds that are typically sold in durations of 4, 8, 13, 17, 26, or 52 weeks. This short-term nature allows investors to quickly access their funds and reinvest in other opportunities. T-bills are also commonly used in portfolio diversification, as they provide stability and counterbalance more volatile assets, reducing overall risk.

Treasury notes (T-notes)

Treasury notes are issued with maturities of 2 to 10 years. Interest is paid every 6 months. This means that investors who purchase T-notes can expect to receive a steady stream of interest payments before the principal amount is repaid. This medium-term nature of T-notes allows for flexibility in investment planning, as investors have the option to hold onto the notes until maturity or sell them on the secondary market. Additionally, T-notes pay interest that's exempt from state and local taxes, making them a popular choice for investors looking to minimize their tax liability.

Treasury bonds (T-bonds)

Treasury bonds, or T-bonds, are issued with maturities of over 10 years, most commonly for 30 years. Interest is paid every 6 months.

One of the key features of T-bonds is that they offer semiannual interest payments, providing investors with a steady stream of income. Additionally, at maturity, the bondholder receives the face value of the bond, making it a reliable source of income for those looking to plan for the future.

T-bonds are exempt from state and local taxes and have historically performed well, even during economic downturns. Both these points make them a popular choice for long-term investing, such as for retirement planning.

Treasury Separate Trading of Registered Interest and Principal of Securities (STRIPS)

Treasury Separate Trading of Registered Interest and Principal of Securities (STRIPS) are created when broker-dealers or the Treasury separates ("strips") the interest and principal of a Treasury note or bond into separate components, which are then traded as zero-coupon securities. Investors buy STRIPS at a price below the face value of the securities and then receive the full amount when the STRIPS mature.

Zero-coupon securities are often sought after by buyers such as pension funds, who are looking for long-term investments with predictable returns. This allows them to plan for future payments and manage their funds more effectively.

Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) are issued in terms of 5, 10, and 30 years. The principal amount rises or falls depending on the consumer price index. This means that the investor's purchasing power remains the same, even if inflation increases. For example, if an investor purchases a $100 TIPS with a 2% fixed interest rate and the CPI increases by 3%, the principal amount will be adjusted to $103, maintaining the purchasing power of the initial investment. TIPS pay interest semiannually at a fixed rate applied to the inflation-adjusted principal. At maturity, the holder is paid the adjusted principal or original principal, whichever is greater. The yield quoted on TIPS is exclusive of inflation or deflation. During periods of deflation, previous positive adjustments to the inflation factor will erode. This means that investors purchasing previously issued TIPS may experience a loss of principal.

The principal amount of TIPS is adjusted every six months based on the CPI, which means that the investor's purchasing power is protected against inflation twice a year. This makes TIPS a popular investment option for those looking to protect their money from the effects of inflation.

Treasury Floating Rate Notes (FRNs)

Treasury Floating Rate Notes (FRNs) are issued with a maturity of 2 years.

The interest rate on a Treasury FRN:

Is tied to short-term rates such as LIBOR or the federal funds rate.
Resets weekly.
Is the sum of the index rate and the spread.

When Treasury bill rates rise, the FRN's interest payments will increase. Similarly, as Treasury bill rates fall, the FRN's interest payments will decrease. Interest is paid quarterly. Floating Rate Notes may have a negative spread, which was set at the auction. This means that the yield on this Floating Rate Note will likely be lower than the yield of the current 13-week Treasury bill.

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How do Treasury securities and bonds work?

Treasury auctions

The U.S. Treasury sells securities through a schedule of regular public auctions, which determine the yield of the securities. It makes periodic adjustments to the auction calendar as its borrowing needs change.

The Treasury announces the amount to be auctioned, and other details including the maturity and settlement dates, several days before the upcoming issue. Securities are auctioned by competitive and noncompetitive bids. Competitive bids generally are placed by dealers and other institutions. Vanguard Brokerage Services® offers only noncompetitive bids limited to $10 million per security per household in one auction. Competitive and noncompetitive bidders receive the same rate or yield at auction.

A non-competitive bid is a bid placed by an investor or entity in a government securities auction without specifying a desired yield or price. This type of bid is usually submitted by small investors or bidders who aren't concerned with the exact yield or price at which they'll receive the security. Non-competitive bids are accepted at the average yield awarded in the auction, allowing small investors to participate in the auction process alongside larger, more competitive bidders.

You can purchase U.S. Treasury securities through TreasuryDirect or through your Vanguard Brokerage Account.

Upcoming Treasury auctions

Secondary market

The secondary market is where investors can buy and sell previously issued securities, such as Treasury bonds. These securities are initially issued in the primary market by the government or corporations to raise funds. Investors can then trade these securities in the secondary market, allowing for liquidity and price discovery.

To buy or sell Treasury bonds in the secondary market, investors can use a brokerage account or work with a financial advisor who has access to the market. This allows for greater flexibility and opportunities for investors to manage their portfolios and potentially earn a return on their investment.

Yields on Treasury securities

Yield refers to the annual return on an investment that an investor can expect to receive from a particular security. The calculation of yield considers the current market price of the security, its coupon rate, and the time to maturity.

Treasuries usually offer lower yields than other fixed income securities because their minimal risk makes them among the safest investments available. This low risk that the securities will default is what makes them attractive to investors.

There are 2 types of yields commonly used for Treasury securities:

Current yield. This reflects the annual interest payment as a percentage of the current market price.
Yield to maturity. This is the total return an investor can expect if they hold the security until it matures.

The price of Treasury securities and market interest rates have a significant impact on yields. When market interest rates rise, the price of Treasury securities falls, resulting in a higher yield. Conversely, when interest rates decrease, the price of Treasury securities rises, resulting in a lower yield.

It's important to note that yields differ for different types of Treasury securities. T-bills, which have a maturity of less than one year, generally have lower yields compared to T-notes and T-bonds, which have longer maturities. This is because investors demand a higher return for holding longer-term securities.

Interest rates and Treasury securities

Treasury securities' interest rates are determined by the supply and demand for these securities in the financial market. The U.S. Department of the Treasury sets the interest rate for these securities based on current market conditions and the government's borrowing needs.

There's an inverse relationship between interest rates and the price of securities. When interest rates rise, the price of securities decreases, and vice versa. This is because investors are more likely to invest in higher yielding securities, causing the demand for lower yielding securities to decrease, thus lowering their price.

Inflation and Federal Reserve policies also play a significant role in determining interest rates on Treasury securities. Inflation erodes the purchasing power of money, causing investors to demand higher interest rates to compensate for the loss. The Federal Reserve, through its monetary policy decisions, can also influence interest rates by adjusting the federal funds rate, which can affect the overall level of interest rates in the economy.

Taxability of Treasury securities

The interest income on Treasury securities is subject to federal taxes but is exempt from state and local taxes.

Treasury notes and bonds, when bought at a discount, may subject investors to capital gains taxes when sold or redeemed. Investors should consult a tax professional for additional information.

Treasury STRIPS and TIPS investors must pay taxes on interest accrued or inflation protection added in the most recent year, even though no cash payments have been received (this is referred to as a tax on "phantom income"). Investors should consult a tax professional for more information.

Interest earned on FRNs is taxable as ordinary income and is subject to federal income tax.

Fees

Vanguard Brokerage Services doesn't charge commissions for any Treasury order placed online.

Benefits of investing in Treasury securities

Safety, security, and predictable returns

Treasury securities are considered one of the safest investments available. The government guarantees to repay the principal and interest on these securities, making them a low-risk option for investors. Additionally, Treasuries have a fixed interest rate and a set maturity date, providing investors with predictability and stability. They also have low inflation risk because interest rates are set by the market and adjusted for inflation. This makes Treasury bills, notes, and bonds all reliable choices for those seeking to minimize risk in their investment portfolio.

Liquidity

Vanguard Brokerage Services doesn't make a market in Treasury securities. If you wish to sell your Treasury securities prior to maturity, Vanguard Brokerage Services can provide access to a secondary over-the-counter market. In general, the secondary market for outstanding Treasuries provides liquidity, and the spread between bid and offer is usually narrower than for other fixed income securities. Nevertheless, liquidity will vary depending on a specific bond's features, lot size, and other market conditions. Treasuries sold prior to maturity may be subject to substantial gain or loss.

Risks

Treasury prices can rise or fall depending on interest rates. Interest rate changes generally have a greater effect on long-term Treasury prices.

All bonds carry risk that the issuer will default or be unable to make timely payments of interest and principal. However, Treasuries carry minimal risk since they're backed by the U.S. government.

Occasionally, Treasuries have call provisions that allow the issuer to buy back the bonds at a fixed price before the stated maturity date. Issuers typically call bonds during periods of declining interest rates.

Treasuries sold before maturity may face a substantial gain or loss. The secondary market may also be limited.

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How to buy Treasury bonds and securities

Purchasing Treasury bonds and securities is a great way to invest in the stability and security of the U.S. government. To buy Treasury bonds and securities, you can visit the official website of the U.S. Treasury Department or go through a broker. Treasury exchange-traded funds (ETFs) and mutual funds, which offer a diversified portfolio of Treasury bonds, can be purchased through most major online brokers or financial institutions. It's important to do your research and understand the different types of Treasury investments available before making a purchase (as well as choosing between funds and individual securities). Additionally, keep in mind that the value of these investments may fluctuate with changes in interest rates and market conditions.

Explore Vanguard's full list of bonds funds

See our list of bond funds

Does Vanguard offer I-bonds?

No, Vanguard Fixed Income Trading does not offer I-bonds. I-bonds are savings bonds and cannot be purchased at Vanguard. No brokerage firm can offer savings bonds unless they also act in the capacity of a bank. In general, savings bonds can only be purchased at local banks or directly through the U.S. Treasury savings bond program (TreasuryDirect.gov).

However, the Fixed Income Trading Desk does offer Treasury Inflation-Protected Securities (TIPS), which can be confused with I-bonds.

All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.

U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.