Treasury Bonds
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Treasury Bonds are a family of bills, notes, and bonds issued by the U.S. Treasury.
Treasury Bonds are issued by the US treasury in groups of three maturity ranges:
- Bills have a range up to one year;
- Notes have a range between one year and ten years;
- Bonds have a range greater than ten years. [1]
Treasury bonds are usually not callable. Treasuries also carry the full faith and credit backing of the US government. [2] The interest income is exempt from state tax. Treasuries can be purchased through brokerages and banks as well as through an individual or entity account at Treasury Direct. [3] Government agencies also issue debt, some of which is backed by the full faith and credit of the government and some which is not.
While TIPS are also issued by the U.S. Treasury and carry the full faith and credit of the US Government, when someone says "Treasuries" they usually do not mean inflation-protected Treasury issues.
Role in a portfolio
Treasuries are the safest nominal investments out there and have a role in any portfolio when absolute safety is needed at the expense of return.
Swensen advocates the use of long-term Treasuries held in small amounts as the perfect diversifier for equities, a concept explored in this forum thread. Swedroe advocates primarily holding Treasuries as the bond portion of a portfolio for similar reasons. "Take your risk in stocks" is a refrain often heard in conversations advocating conservatism in bond investing, as the potential reward for taking on risk with bonds is limited by the coupon rate, whereas with stocks the investor shares fully in the up-side when risks are rewarded.
Others advocate building a bond allocation around a core of Treasuries but branching out--assuming more risk in the hope of greater reward. Categories often advocated by reasonable commentators for this approach (including Bogleheads Guide authors) include MBS and Corporate Bonds. Boglehead and expert Rick Ferri advocates the inclusion of a small portion of junk bonds as well; while in a diversified portfolio this is a reasonable approach, investors should ensure they understand the risks of such a strategy as well as how the segment fits in to their overall portfolio and goals before proceeding, as higher yield comes with higher risks.
For more guidance as to the role of Treasuries and other instruments in a portfolio, see the Bond Basics page.
References
- ↑ Treasury Direct: Treasury Securities & Programs
- ↑ Treasury Direct Why You Should Consider Treasury Securities for Your Portfolio
- ↑ Treasury Direct Treasury Bonds
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