Everybody needs a deep-pocketed relative, and Americans have Uncle Sam.
Uncle Sam, though, typically lives beyond his means. When the federal government borrows from its own citizens to pay for public works and other programs, it offers them an IOU in the form of Treasury bonds. These bonds are easy to buy and low-risk. As with all forms of fixed-income investments, it can be smart to include Treasury bonds as part of a balanced investment strategy.
What are Treasury bonds?
Treasury bonds are one form of government debt. The US Department of the Treasury borrows from the investing public through bonds that are repaid with a set interest rate, usually over a longer period. The bonds are currently offered with maturities of 20 or 30 years and pay simple interest every six months until maturity. When the bond matures — when its pre-set term is up — you get back all the money you invested in the bond. It’s important to note that Treasury bond yield is based on simple interest, so it does not compound.
How do Treasury bonds work?
Treasury bonds are packaged and sold through the Treasury Department. The proceeds from selling bonds fund long-term projects, like building roads and bridges. Because the borrower is the US government, which is unlikely to default, Treasury bonds are considered to be very low-risk investments. New Treasury bonds are issued four times a year, according to a schedule published online by the Treasury Department. Bonds of various maturities are also re-opened eight times a year, creating a chance for investors to buy into previously issued bonds.
When the bond matures, the Treasury Department automatically deposits the principal into the bank or investment account you have designated.
Pros and cons of investing in Treasury bonds
Pros
Patriotism aside, investing in Treasuries can be a cornerstone of a balanced portfolio, said Paul Brahim, a managing director at Wealth Enhancement Group and 2025 president-elect of the Financial Planning Association.
In their forties, many people start thinking about moving some of their retirement investments, primarily stock market investments, to a mix of stock and fixed-income investments, like bonds, because they become cognizant of market ups and downs, said Brahim. That’s the point where people often merge risk management into their portfolio design, as they want to hold on to and protect some of the market gains they have accumulated, having also experienced market losses.
Bonds and fixed-income investments “provide diversity relative to the volatility of equity markets, and that creates a chance to rebalance,” said Brahim.
Cons
Your money is not at risk in Treasury bonds unless the US government defaults on its obligations to its creditors, which is highly unlikely. The real risk comes in not fully appreciating the costs of exiting the bonds early, which requires smart timing to sell when re-investment options are high enough to cover the transaction costs.
Another risk of investing in Treasury bonds is called interest rate risk. Just like other types of fixed-rate bonds, Treasury bond prices fall when market interest rates rise. For example, say new bonds with higher interest rates come to market while you own an older bond with a lower interest rate. In that case, your bond becomes less valuable because its interest rate is less desirable to investors. If you sell that Treasury bond before its maturity during a period of higher interest rates, you may not get as much for it as you originally paid.
| Pros | Cons |
|---|---|
Provide diversification within investor portfolios | Require smart timing when exiting bonds before maturity |
May help protect accumulated market gains | Come with interest rate risk |
Are considered very low-risk investments | Pay simple interest, which does not compound |
Comparing Treasury bonds, notes and bills
The US Treasury offers a spectrum of short-, medium- and long-term options for lending to the federal government. Treasury bills have maturities of four weeks to a year, while Treasury notes have maturities that range from two to 10 years.
The Treasury Department also offers savings bonds, which are distinct from Treasury bonds. Savings bonds are structured to deliver a certain amount of return by a certain maturity date. For instance, EE bonds double the initial investment in 20 years, and the interest on I bonds is adjusted every six months to reflect inflation trends.
| Treasury security | Available maturities | Interest payments | Minimum investment |
|---|---|---|---|
Bills | Four to 52 weeks | At maturity | $100 |
Notes | Two, three, five, seven or 10 years | Every six months until maturity | $100 |
Bonds | 20 or 30 years | Every six months until maturity | $100 |
How to buy Treasury bonds
Treasury bonds, notes and bills can be purchased for as little as $100 directly from the US Treasury at the TreasuryDirect website. You can also buy Treasuries through investment advisors, investment firms and banks.
Key considerations before buying Treasury bonds
“If you have a specific use for a piece of money, you’re better served to buy a certificate of deposit (CD) or a Treasury that matures when you need that money,” said Brahim. “For specific spending needs, at a specific time, a CD or Treasury is safe” because you are sure to reclaim all the money you initially put in at maturity, along with the accumulated interest (minus interest you have withdrawn along the way). The key, he said, is to match the maturity of the bond or CD to the date when you expect to need the funds.
Treasury bonds versus other investment options
In general, when stocks rise in value, bonds are less attractive because they don’t deliver the same returns as a heady stock market. But when the stock market is in the doldrums, or even losing, bonds rise in value because they offer a way to protect the gains you made in stocks when they were on the rise.
It takes planning, said Brahim, but a smart strategy is to sell bonds (if they are already set to mature) when the stock market is down and put that money into well-priced stocks. Then, when the stock market rises again, sell those stocks and move the gains into the next issuance of bonds with the intention of letting that money accumulate safely, he said.
According to analysis by RBC Wealth Management, in the past five years, Treasuries have fulfilled their historic role as a stabilizing force during turbulent times. In 2020 — the year of the global Covid-19 pandemic, US Treasuries delivered an 8% return, outpacing municipal bonds and mortgage-backed securities (MBS), though they were outstripped by investment-grade corporate debt. The next year, though, as interest rates remained low overall, Treasuries sank, declining 2%; that year, high-yield corporate debt was the star, with a 5% return for the category.
For 2024, RBC predicts that Treasuries will leap ahead (with a 10% total return) partly because of the potential for the Federal Reserve to cut interest rates, matched by investment-grade corporate debt. Still, both will likely be outpaced this year, RBS predicts, by MBS, reflecting relentless demand in the housing market, despite mortgage rates that have risen in the past five years.
| Market | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 (projected) |
|---|---|---|---|---|---|---|
Emerging markets | 33% | 7% | -2% | -15% | 1% | 9% |
High-yield corporate debt | 35% | 7% | 5% | -11% | 7% | 9% |
Investment-grade corporate debt | 25% | 10% | -1% | -16% | 0% | 10% |
Mortgage-backed securities | 14% | 4% | -1% | -12% | -2% | 12% |
Municipal bonds | 19% | 5% | 2% | -9% | 0% | 7% |
Treasuries | 12% | 8% | -2% | -12% | -1% | 10% |
RBC Wealth Management data as of November 9, 2023
The impact of Treasury bonds on your investment portfolio
The best way to take advantage of the guaranteed return of Treasury bonds, Brahim said, is to time the maturity for a long-term goal, so that the whole of the bond plus interest is available to fund, say, a child’s college education or retirement income.
But, he added, that strategy counts on buying and then holding the bonds. Because it can be complicated and costly to sell the bonds before they mature, a common strategy is to invest smaller amounts in bonds that have successive maturity dates. With the “laddering” strategy, a bond is always maturing, so cash is always becoming available. You can decide with each maturing bond if you want to take the cash for a spending or investing need or put it right back into the next issue of bonds.
Overall, Treasury bonds, along with other fixed-income investments, are “the great diversifier,” said Brahim.
Frequently asked questions (FAQs)
Treasuries with very long maturity dates let bondholders take some of the interest along the way. For example, Treasury bonds, with maturities of 20 or 30 years, pay interest every six months. The specific terms vary with the term of the bond, with some short-term bonds paying interest only upon maturity, when the bondholder claims the full amount — both the principal initially used to buy the bond plus the accumulated interest.
Investors can buy Treasuries for as little as $100.
Yes. However, selling a Treasury before its maturity date requires several steps. First, there is a 45-day hold before you can exit the bond. Second, the bond must be transferred from the Treasury Department to an investment or bank account that can manage the transfer of the bond to buyers’ markets.
Interest earned from Treasuries is taxed as regular income in the year in which the interest is earned. The Treasury Department issues 1099 forms to investors who must report the income on their annual income tax returns. The Internal Revenue Service (IRS) also receives records of the interest paid. However, Treasuries held inside tax-advantaged retirement accounts, such as 401(k) plans and individual retirement accounts (IRAs), do not invoke taxes while interest accumulates. The tax rules that apply to the retirement account override the tax rules for Treasury bond interest income for bonds held independently. In any event, state and municipal income taxes do not apply to Treasury bonds.
