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Understanding Treasury Bonds: How to Invest in Low-Risk Government Debt Securities

Explore the low-risk investment opportunity of Treasury Bonds and learn how to invest in these government debt securities through ETFs, mutual funds, or direct purchases on the TreasuryDirect website. Discover the benefits and risks of investing in T-bonds, and how to get started on your investment journey.

Summary

  • Treasury bonds, also known as T-bonds, are debt securities issued by the United States government
  • When an individual purchases a T-bond, they are essentially lending money to the government in return for the government agreeing to pay back the principal amount of the bond plus interest over a specified period of time
  • T-bonds have a fixed term, typically 20 or 30 years, and pay interest semi-annually
  • They can be purchased in increments of $100, making them accessible to a wide range of investors
  • T-bonds are considered low-risk investments as they are issued by the government and guaranteed by the full faith and credit of the United States government
  • The interest rate of T-bonds can vary depending on market conditions, as of 2021, the current rate for 20- and 30-year bonds is 4%
  • T-bonds can be purchased through exchange-traded funds (ETFs) or mutual funds, or directly from the U.S. government through the TreasuryDirect website
  • To purchase T-bonds directly through TreasuryDirect, one needs a taxpayer identification number or Social Security number, a U.S. address, and a checking or savings account linked for payment.
  • When the bond matures, the yield will be automatically deposited into your linked bank account.

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What Are Treasury Bonds and How Do They Work?

A Treasury bond, also known as a T-bond, is a type of debt security issued by the United States government. When an individual purchases a T-bond, they are essentially lending money to the government. In return, the government agrees to pay back the principal amount of the bond, plus interest, over a specified period of time.

T-bonds have a fixed term, typically 20 or 30 years, and pay interest semi-annually. They can be purchased in increments of $100, making them accessible to a wide range of investors. As they are issued by the government, they are considered low-risk investments and are guaranteed the full faith and credit of the United States government.

It’s worth noting that the interest rate of T-bonds can vary depending on market conditions, but as of the knowledge cutoff (2021), the current rate for 20- and 30-year bonds is 4%. The rate will be next updated in February 2023.

Different Ways to Invest in Treasury Bonds: ETFs, Mutual Funds, and Direct Purchase through TreasuryDirect

From a Broker or Bank

One of the most popular ways to invest in Treasury bonds is through exchange-traded funds (ETFs) or mutual funds. These investment vehicles allow individuals to purchase many government bonds all at once, rather than buying them directly from the U.S. government.

ETFs are a basket of investments, such as stocks or bonds, that can be bought and sold like any other stock. Treasury ETFs specifically invest in U.S. Treasury securities, and they can be purchased through a brokerage platform. Mutual funds, on the other hand, allow investors to pool resources and gain exposure to a variety of securities without having to purchase or manage them individually.

Both ETFs and mutual funds offer the convenience of owning a diverse set of Treasury bonds that mature at different times and having them managed for you. According to Nicholas Juhle, CFA and CIO of Greenleaf Trust, “When the bonds mature, they’re rolling that back into new Treasury for you all the time.” To understand the composition of an ETF or mutual fund, Juhle recommends checking the prospectus which describes exactly what can and cannot be held in the fund. For example, the prospectus might indicate whether the fund holds 80% T-bonds or 100% T-bonds.

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Directly from the U.S. government through the TreasuryDirect website

To purchase Treasury bonds directly from the U.S. government, you can use the TreasuryDirect website. Before starting, make sure to have your taxpayer identification number or Social Security number, a U.S. address, and a checking or savings account linked for payment.

Here’s how:

  1. Go to TreasuryDirect.gov and create an account if you don’t already have one.
  2. Select the type of account you want to open: individual, business or organizational, or estate and trust.
  3. Enter your personal information, including your taxpayer identification number or TIN, U.S. address, and bank account details.
  4. Create a username and password to access your account.
  5. Once your account has been confirmed, log in and go to the “Buy Direct” tab.
  6. Choose Treasury bonds as the security you want to purchase and enter the amount you wish to buy.
  7. Click “buy” to complete the purchase.

When the bond matures, the yield will be automatically deposited into your linked bank account.

Important Treasury Bond Terms

Key termsDefinitions and examples
Annual coupon paymentThe total investment interest payment over the course of 1 year.
Coupon payment frequencyHow often an investment interest payments are made. T-bond coupon payments pay every 6 months until maturity.
Discount priceThe price of the bond if it falls below face value.
Face valueThe price of the bond is held to maturity.
Interest rateThe amount a lender charges a borrower to loan them money. The interest rate for T-bonds as of November 2022 was 4%.
PriceWhat investors will pay for a (Treasury) bond, which is affected by the economic environment.
Years to maturityT-bonds mature in 20 or 30 years.
Yield to maturityThe total investment return if a bond is held to maturity.
Bond Terms

Conclusion

In summary, Treasury bonds, also known as T-bonds, are debt securities issued by the United States government. They provide a low-risk investment opportunity for individuals looking to lend money to the government. They have a fixed term, typically 20 or 30 years, and pay interest semi-annually. T-bonds can be purchased through exchange-traded funds (ETFs) or mutual funds, or directly from the U.S. government through the TreasuryDirect website. The interest rate for T-bonds can vary but as of 2021, the current rate for 20- and 30-year bonds is 4%. It’s important to note that a taxpayer identification number or Social Security number, a U.S. address, and a checking or savings account linked for payment are required when buying T-bonds directly from the U.S government.

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Questions Answered in this Article

  1. What is a Treasury Bond? A: A Treasury bond, also known as a T-bond, is a type of debt security issued by the United States government where an individual lends money to the government and in return, the government pays back the principal amount of the bond, plus interest, over a specified period of time.
  2. How long is the term of a T-bond? A: T-bonds have a fixed term, typically 20 or 30 years.
  3. How often do T-bonds pay interest? A: T-bonds pay interest semi-annually.
  4. How can I invest in Treasury Bonds? A: One of the most popular ways to invest in Treasury bonds is through exchange-traded funds (ETFs) or mutual funds. Another way is to buy directly from the U.S. government through the TreasuryDirect website.
  5. Is there a current rate for 20- and 30-year bonds? A: As of the knowledge cutoff (2021), the current rate for 20- and 30-year bonds is 4%. The rate will be next updated in February 2023.

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