Trading Treasury Bonds

Written by Jacey Harmon
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The "long bond," or Treasury bond, has the longest maturity date of all Treasury debt certificates. The 30 year maturity is how the T-bond became known as the long bond. The long bond earns an annual interest rate that is paid out semi-annually until maturation. Interest is exempt from local and state taxes but is subject to federal income tax. Since the T-bond is backed by the full faith and credit of the United States, it has a lower interest rate than bonds with similar maturations.

In 2001, the U.S. Treasury Department stopped issuing 30 year bonds. As there are no new long bonds issued anymore, the only way you can buy a bond is to purchase it in the secondary market. This requires the use of a broker to purchase long bonds instead of Treasury Direct. Treasury Direct is a program allowing investors to purchase debt certificates directly from the Treasury Department without paying any fees.

In the secondary market bonds work in an upside down fashion. After a bond is issued, if interest rates increase, the market price for the bond will decrease. If interest rates happen to fall, the market price for the bond will increase. This price fluctuation doesn't have any affect on the validity of the bond, however. Upon maturation you will receive your initial investment back. Only if you try to sell the bond in the secondary market will you be affected by fluctuating market prices.

Treasury Bond Derivatives

The Chicago Board of Trade (CBOT) offers a futures contract on the 30 year T-Bond. The contract size is one T-Bond with a face value at maturity of $100,000 or multiple thereof. The CBOT has specified that T-Bonds to be delivered through a futures contract must not be callable for at least 15 years. A callable bond is one that can be purchased by the Treasury Department before its maturation date. The 30 year futures contract is quoted in points--one point equals $1,000--and 32nds of a point. A contract quote of 100'01 would mean the contract is trading at $100,003.125.


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