United States Treasury security

A United States Treasury security is a fixed income security issued by the United States Treasury Department. U.S. Treasury.

Treasuries are backed by the full faith and credit of the US government, and usually are not  callable. 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. Government agencies also issue debt, some of which is backed by the full faith and credit of the government and some which is not.

Types of treasury securities
There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).


 * Bills have maturities ranging from a few days to 52 weeks.
 * Notes have maturities ranging from one year to ten years.
 * Bonds have maturities of greater than ten years.
 * TIPS are marketable securities whose principal is adjusted by changes in the Consumer Price Index. TIPS pay interest every six months and are issued with maturities of 5, 10, and 30 years.

Role in a portfolio
As a type of fixed-income security, treasuries are a candidate for the fixed-income portion of a portfolio. The primary risks of fixed-income securities, in general, are credit risk and interest-rate risk. Since treasuries are widely considered to have no credit risk, this leaves primarily interest-rate risk as a consideration. For nominal Treasuries (Treasuries other than TIPS), inflation risk also is a consideration.

Because there is no credit risk, it is not necessary to diversify by holding a large number of treasury securities. Nevertheless, mutual funds are available that invest only in treasuries, and some investors use these funds for convenience.

Due to their short-term maturities, treasury bills have very little interest-rate risk, and thus generally are considered the safest type of fixed-income security. See Treasury bill for more details on the role of T-Bills in a portfolio. FDIC-insured bank accounts and short-term Certificates of Deposit (CDs) are similarly safe alternatives for retail investors.

The interest-rate risk and inflation risk of treasury notes and bonds is proportional to their maturities (i.e., longer maturity = higher risk). Reinvestment risk also is a consideration. Most Bogleheads Authors recommend holding shorter-term fixed income securities, including treasuries, perhaps with maturities no greater than five years.

"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 newly issued bonds held to maturity is limited by the coupon rate, whereas with stocks the investor shares fully in the up-side when risks are rewarded.

Some authors recommend holding longer-term nominal treasuries, especially if the investor has a high allocation to equities. A recent paper co-authored by Larry Swedroe presented evidence that this was an effective strategy. David 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. See Treasury bond for more on the role of longer-term treasury bonds in a portfolio.

Others advocate building a bond allocation around a core of Treasuries, but also including other types of bonds--assuming more risk in the hope of greater reward. Categories of bonds often advocated by reasonable commentators for this approach (including Bogleheads Guide authors) include Mortgage Backed Securities (MBS) and Corporate Bonds. The popular Vanguard Total Bond Market Index fund holds treasuries as well as corporate bonds and MBS.

A common recommendation for the fixed-income portion of the portfolio is to hold some nominal bonds, including treasuries, and some TIPS. Larry Swedroe advocates primarily holding TIPS or short-term nominal Treasuries as the fixed-income portion of a portfolio. Maturities of TIPS can be extended because of the inflation protection feature. See Treasury Inflation Protected Security for more on the role of TIPS in a portfolio.

Bogleheads author and investment manager 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.