United States Treasury Securities

The United States Treasury, since the very first Administration under George Washington, has been borrowing more money than many folks feel is prudent by issuing “government bonds.” The 13 states had amassed a huge amount of debt during the American Revolution, and Washington’s Treasury Secretary, Alexander Hamilton, was convinced that the new federal government should absorb all that debt and start financing it by issuing government securities to investors. Ever since, investors who feel that the US Government is a worthy borrower have been able to turn their money over to the folks who printed it in the first place, receive modest rates of interest on that money, and after a certain period of time get the money right back, without lifting a finger. If you want to lend money to the US Treasury short-term, you buy a Treasury bill (T-bill). If your time frame is 2-10 years, you buy a Treasury note (T-note). And, if your time frame is 30 years, you can buy a Treasury bond (T-bond). Generally, T-bills pay much lower yields than T-bonds because investors who are only willing to lend their money for a few weeks at a time don’t generally receive high interest rates from the borrower. If T-bills offer yields of 2%, 30-year T-bonds might be yielding more like 4 %. If interest rates are high and T-bills currently pay 4%, T-bonds might be offering 6%. So, why doesn’t everybody just buy the T-bonds, then? Because not everybody wants to tie up her money for 30 years. See, even though someone holding a 30-year T-bond could sell her bond to another investor at any point, the price she receives could be much lower than she paid. Why? If the new interest rate environment reflected in auto loans, mortgages, etc. is higher than when that T-bond was issued, that T-bond’s market price will drop. If your T-bond issued a few years ago pays you a flat 4%, for example, when today’s T-bonds are offering 6%, you might have to sell your T-bond for much less than you paid for it. Which would stink, since these are government-guaranteed securities. The only excuse for losing money on US Treasury securities is that you had to sell before the thing matured, which is a pretty lame excuse, actually. With T-bills, T-notes, and T-bonds, all you really have to do is know how long you can set the money aside and stick to the plan. If you can only part with this money for a year or less, buy a T-bill. If you can truly put the money aside for 30 years, buy a T-bond and enjoy the higher return. You won’t get rich on either investment, but your security is guaranteed against default by the United States Treasury, the same people who guarantee the value of the 10’s and 20’s sitting in your wallet.