Treasuries as an Investment

The single most important investment in the global financial system is the U.S. Treasury Security. In my first investing class in college, I remember the professor explaining that our entire investing and financial system is built upon the premise that treasuries are the safest investment and that the U.S. always pays its debts. That statement might sound strange to those who are not a fan of the way we as a country run a deficit or to those who have paid close attention to the budget ceiling fights in recent years. Despite those factors, the premise is true, and that is why treasuries are the single most important investment in the U.S. financial system.

So what are treasuries? They are debt securities issued by the U.S. Department of the Treasury to finance the government's operations and fund various projects. Of course, they are backed by the full faith and credit of the U.S. government and are considered to be safe, liquid, and reliable. Treasuries are owned by nearly every pension plan, institutional investment operation, foreign government, endowments, and large foundations. 

Essentially when you buy a treasury, you are loaning the government a sum of money for a set period of time and set time period. For example, if you buy $10,000 worth of 2-year treasuries at 4.75%, you have essentially loaned the government $10,000, for which they will pay you 4.75% a year until the treasuries mature (2 years). At maturity, you receive your initial investment back ($10,000).

Treasuries come in a variety of types and durations, but the most common are. 

• T-bills: Short-term securities with maturities ranging from a few days to one year.
• T-notes: Medium-term securities with maturities ranging from two to ten years. 
• T-bonds: Long-term securities with maturities ranging from twenty to thirty years.

Treasuries are bought either at auction from The Treasury Department or in the secondary market. The secondary market is where investors buy, sell, and trade securities with each other. Treasuries will, of course, fluctuate in value until maturity, but the maturity value is fixed. This means that you may be able to purchase treasuries for $9,000 that will mature at their $10,000 value.  This tends to happen when interest rates are not attractive enough for secondary investors to pay full price.  The longer the duration of the treasury, the more it will fluctuate in value. To this end, longer-term treasuries can actually be quite volatile as interest rates move up and down over a long period of time.

As far as taxation is concerned, interest from treasuries is taxed at the federal level but are exempt from state and local taxes. 

We view treasuries, particularly short and mid-term treasuries, as a tool in a well-diversified portfolio. Additionally, when interest rates are attractive short-term treasuries can be used to earn interest on funds that need to be safe and liquid. For example, if someone knows they will be buying a house in 9 months, they will have cash set aside for this purchase, if we can earn more interest in a treasury, then the bank is paying, therefore parking some of that cash in short-term treasuries may be a perfectly valid strategy. 

It's true that all investments carry risk, but in the grand scheme of things, treasuries are as safe of an investment as can be found. When used properly, they are an excellent tool to a well-designed financial plan.

Written by: Brice Carter 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.