Treasuries

Treasuries act like bonds, except with a much lower yield rate and a much lower risk of default. Anyone can buy a treasury security, however major buyers include Banks, Insurance Companies, the Fed, and mutual funds, as well as individual investors.

Tax Advantage: Treasury Interest is taxable federally, but generally exempt from state and local income taxes, making it beneficial for those in high-tax states.

Types and Maturity Length

A treasury bill matures in a year or less.

A treasury note matures in 2-10 years

A treasury bond matures in 20-30 years

Yield vs Coupon

Yield is what investors actually earn based on market price. Ex: bond pays 50 annually, if the market price drops to 800 yield becomes 6.25 from 5%

Coupon is yield, but fixed at the issuing price.

Inflation Control

Since the fed is a major bond purchaser, the fed can use Treasuries as part of open market operations.

Sells treasuries to decrease money in circulation, often decreases inflation - tight money policy

Buys them to increase money in circulation - easy money policy

Typically, the fed conducts these with Primary Dealers, banks and security firms.

Yield Curve

2 year note = 3%

10 year note = 4%

30 year bond = 5%

Inverted yield curve

Often preceded recessions historically

2 year note = 5%

10 year note = 4%

Remember

They are securities, but not derivatives because they are legal tender like bonds.

Inflation Risk: If inflation rises over bond return rate, real return can become negative and market value declines significantly.

Treasuries are sold through auctions, large buyers submit bids, the treasury determines how much debt to issue and what yield investors require.