U.S. Treasury Securities

Treasury securities are an obligation of the U.S. government and are considered the safest of all debt instruments because there has never been a default in payment. This concept is sometimes stated with the words "full faith and credit of the U.S. Government." Treasury securities are sold at periodic government auctions, with fewer issues being sold recently because of the shrinking federal deficit. They are exempt from state and local income taxes due to the principal of reciprocal immunity. This means that the federal government doesn’t tax state and local debt (e.g., municipal bonds) and state and local governments don’t tax federal debt (e.g., Treasury securities).

There are two types of Treasury securities currently available for purchase: bills and notes. All require a $1,000 minimum deposit with larger amounts purchased in increments of $1,000. Treasury bills have the shortest term of all Treasury securities and come in three- and six-month maturities. They are bought at a discount with investors paying $1,000 or more up front and receiving back an amount, called "the discount," equal to the interest rate determined by the most recent auction. At maturity, an investor’s original purchase amount (principal) is returned. If interest rates are 4%, for example, an investor with $1,000 would receive a discount of $40 ($1,000 x 0.04) shortly after purchase and their $1,000 principal back at maturity.

Treasury notes currently come with two-, five-, and 10-year maturities. They pay a fixed rate of interest semi-annually until maturity, when investors get their principal back. For example, a $1,000, five-year Treasury note with a 5% yield pays $25 every six months ($50 per year). The yield on Treasury notes is generally higher than that of bills to compensate for the risk of investing longer and the greater volatility that accompanies interest-rate changes.

Treasury securities can be purchased from a bank or brokerage firm for a fee of about $50 or with no fee from the Federal Reserve Bank’s "Treasury Direct" program. An application, called a tender form, is required and can be obtained by calling 202-874-4000 for a list of Federal Reserve Banks or through the Treasury Department Web site http://www.publicdebt.treas.gov/. With Treasury Direct, an investor must specify a bank account where his or her interest payments can be deposited electronically. Treasury securities also can be sold through the Treasury Direct program for a nominal charge.