Takeaways
- U.S. Treasury Bonds have maturities of either 20 or 30 years.
- U.S. Treasury Bonds pay a fixed rate of interest every six months to bondholders.
- U.S. Treasury Bonds are issued in $100 increments, ranging from $100 to $10 million.
- U.S. Treasury Bonds are considered the long-term risk-free rate by institutional investors.
- Investors can purchase U.S. Treasury Bonds through banks, brokerage accounts, or TreasuryDirect.gov.
What Are U.S. Treasury Bonds?
U.S. Treasury Bonds, commonly called T-Bonds, are long-term interest-bearing debt securities issued by the U.S. Department of the Treasury.[1] They are considered one of the safest investments you can make because they are backed by the full faith and credit of the U.S. government.
T-bonds have maturities of 20 to 30 years, making them the “risk-free” long-term investment of choice for sophisticated investors. T-bonds pay a fixed rate of interest semiannually (every six months) and return your principal investment amount at maturity.
Due to their security and stability, T-bonds are very popular among fixed-income investors seeking a combination of capital preservation, diversification, and a reliable income stream.
Institutional investors like T-bonds because they offer a known rate of return. These investors use T-bonds to give them a known rate of return and then optimize their investment portfolios by adding in higher-risk investments like stocks, cryptocurrency, and real estate.
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On January 2, 2025, a 20-year Treasury Bond yielded 4.86%.[1]
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How U.S. Treasury Bonds Work
U.S. Treasury bonds work similarly to other types of bonds. They are sold at auction, where the price and yield are determined.
When you purchase a T-Bond, you lend money to the U.S. government for a specific period. As a reward, the government pays you interest income every six months until the bond matures. At maturity, you receive the face value of the bond, which is the initial amount you invested. Investors can hold the bond until maturity or sell it before it matures.
Smart Tip:
U.S. Treasury Bond auction frequency can be found here.
The yield on T-bonds is determined by several factors, including the bond's coupon rate (the annual interest rate expressed as a percentage of the face value), the purchase price, and the time until maturity.
Like many bonds, the yield to maturity, which accounts for the total return over the bond's life, fluctuates depending on the bond’s purchase price and current market interest rates.
Learn More: Here’s How to Build a Bond Ladder
U.S. Treasury Securities
The U.S. Treasury bond is the longest-term debt security issued by the U.S. Department of Treasury. However, the department issues other securities for investors, including:
- U.S. Treasury Bills
- U.S. Treasury Notes
- U.S. Treasury Bonds
- U.S. Treasury Inflation-Protected Securities
Each of these investments has unique coupon payments, terms, structures, and nuances. Depending on your portfolio, you can use each type of investment to optimize your holdings for diversification, yield, and investment maturity.
3 Places to Buy Treasury Bonds
Investors can purchase T-Bonds through several channels:
1. TreasuryDirect: The U.S. Department of the Treasury’s online platform allows investors to buy T-Bonds directly from the government. TreasuryDirect.gov offers a convenient and cost-effective way to purchase T-Bonds without incurring fees or commissions.
2. Banks and Other Financial Institutions: Many banks and brokerage firms offer T-Bonds to their customers. This option is convenient for investors who prefer to manage all their investments in one place, though these institutions may charge fees or commissions. (Read about how to set up your online brokerage account).
3. Secondary Market: Brokers can also purchase T-Bonds in the secondary market. The secondary market provides opportunities to buy and sell T-Bonds already in circulation, potentially at different prices based on current interest rates and market conditions.
Advantages of U.S. Treasury Bonds
T-bonds are often considered a good investment for several reasons:
- Investment Safety: T-bonds are backed by the U.S. government, which makes them one of the safest debt security investments. As a result, T-bond investments usually become a haven for investors during times of economic uncertainty. (Read more about other low-risk investments).
- Predictable Income: The semiannual interest payments provide a predictable and stable income stream, which can be especially valuable for retirees or those who want a steady cash flow. (Read more about how to retire early).
- Capital Preservation: T-bonds return your principal amount at maturity, preserving your initial investment. Conservative investors and financial planners rely on this capital preservation when optimizing their financial portfolios. (Read more about robo-advisors).
Disadvantages of U.S. Treasury Bonds
Not all investors gravitate toward T-bonds. Here are several cons to investing in U.S. Treasury Bonds, including:
- Lower Returns: T-bonds' safety and predictability mean that investors are willing to accept a lower rate of return for this security. Institutional and accredited investors who want higher returns gravitate toward higher-yielding investments, like dividend stocks or corporate bonds.
- Interest Rate Risk: T-Bonds' value fluctuates with interest rate changes. When interest rates rise, the price of existing T-Bonds falls, and vice versa. (Read more about the federal funds rate).
- Inflation Risk: The fixed interest payments may not keep pace with inflation, potentially reducing the purchasing power of returns over time. As a result, investors can also purchase investments tethered to interest rates, like a Treasury Inflation-Protected Security (TIP). (Read about 26 ways to beat inflation).
5 Government Initiatives Funded by T-Bonds
The U.S. government uses the money raised from issuing T-Bonds to fund various public programs. The capital raised through bond issuance is critical to maintaining the federal government's operations and supporting programs.
Some of the essential areas funded by U.S. Treasury bonds include:
1. Public Infrastructure: T-bonds help finance the construction and maintenance of roads, bridges, airports, and other critical infrastructure projects. This investment is essential for supporting economic growth and public safety.
2. Social Programs: Funds from T-Bonds support social programs such as Social Security, Medicare, and Medicaid. These programs provide essential services to millions of Americans, including retirees, low-income individuals, and those with disabilities.
3. Defense and National Security: T-Bonds finance military operations and defense initiatives, ensuring the U.S. can maintain its national security and respond to global threats.
4. Education and Research: T-bonds often fund investments in education, scientific research, and technology. These initiatives help drive innovation, improve public health, and enhance the overall quality of life.
5. Debt Servicing: Part of the funds raised through T-Bonds is used to pay interest on existing government debt. This helps the U.S. manage its overall debt levels and maintain its creditworthiness.
Smart Summary
U.S. Treasury Bonds are interest-bearing debt securities issued by the U.S. Treasury Department. These bonds are secure and stable investment securities backed by the U.S. government. Conservative investors gravitate toward them because of their predictable income and capital preservation. Personal finance experts advocate that a well-balanced portfolio should have exposure to U.S. Treasury Bonds and other stable income-producing investments.
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Frequently Asked Questions
Yes. Normally, longer-term bonds, such as the 30-year U.S. Treasury Bond, earn a higher interest rate than the 20-year T-bond because investors lock their funds up for longer.
The semiannual interest payments are only taxed as interest income for your federal income taxes. You do not have to pay state or local taxes on your interest income from T-bonds. (Read more about how to file your taxes).
Your investments in T-bonds depend on your financial goals and objectives. Many investors choose to invest in T-bonds or T-bills because they are considered a haven. However, they are not high-yielding investments, like a high-yield savings account, stocks, or cryptocurrencies.
(1) U.S. Department of the Treasury. Treasury Bonds. Last Accessed January 12, 2025.
(2) U.S. Department of the Treasury. Daily Treasury Par Yield Curve Rates. Last Accessed January 12, 2025.
