Treasury Bonds

Written by Jacey Harmon
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There are three types of marketable U.S. Government debt securities: T-Notes, T-Bills, and T-Bonds. Currently, the Treasury Department only issues T-Notes and T-Bills. In October of 2001, the Treasury Department stopped issuing long term T-Bonds. There are still some T-bonds that have yet to be redeemed and hence they still trade on the debt markets. Treasury securities are backed by the full faith and credit of the U.S. Government.

The difference between notes, bills, and bonds is simply their time frame. T-Notes are short term investments. They are typically issued with 13 or 26 week timeframes. T-Bills will range from 2 year up to 10 year investments. Bonds are long term investments, hence the nickname "long bond," and will carry a 30 year timeframe. T-Bills will have the lowest interest rates while T-Bonds will have the highest interest rates. The difference in yields between bills, notes, and bonds is known as the yield curve.

T-Notes are issued at a discount. For example, you would buy a $1,000 T-Note for $900, upon redemption you receive the full $1,000 and the $100 is the interest paid. T-Bills and bonds are not issued at a discount. Instead, they pay a coupon rate that is paid semi-annually. A coupon rate is simply the annual interest rate of the note. For example a $1,000 5 year T-Note with a coupon rate of 4 percent would pay $400 percent a year in interest for five years. Upon redemption the original $1,000 investment is returned.

Trading Treasury Securities

There are two ways to take advantage of trading Treasury securities. The first way is to buy the note itself from the treasury department. Treasury securities are sold via competitive bidding at a weekly auction. All current bills and notes are issued in $1,000 increments. There are two types of order placements: competitive and non-competitive. With a competitive order, you make a bid for what interest rate you want. There is no guarantee as to whether or not your order will be filled with a competitive bid. Non-competitive bids are always filled at the auction's going rate.

Futures are a way a trader can capitalize on debt securities without buying the securities themselves. Interest rate futures trade on the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME). The CBOT offers futures on: 2, 5, and 10 year notes as well as the 30 year bond. The CME offers futures on the 13 week T-Bill. Futures carry a high degree of risk and a trader should be well educated as how to properly trade these instruments. Treasury securities themselves, however, are considered the safest investments on the planet.


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