Treasury bond

Treasury bonds are a family of notes, and bonds issued by the U.S. Treasury.

Treasury bonds are issued by the US treasury in two maturity ranges:
 * Notes have a range between one year and ten years;
 * Bonds have a range greater than ten years.

Treasury bonds are usually not callable. Treasuries also carry the full faith and credit backing of the US government. 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.

Note: When someone refers to "Treasuries" they usually do not mean inflation-protected Treasury issues (TIPS), which are also issued by the U.S. Treasury and carry the full faith and credit of the US Government.

Role in a portfolio
Treasuries are widely considered the safest nominal investments available, and can be considered for all or part of the fixed-income portion of any portfolio. Treasuries have no credit risk, and short-term treasuries have little interest-rate risk. FDIC-insured bank accounts and Certificates of Deposit (CDs) are a similarly safe alternative for retail investors. Longer-term treasuries have interest-rate risk.

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.

Historical returns
The following table provides return data for the 10-year Treasury bond for the years spanning 1928 through 2011. Inflation data, as measured by the CPI-U is also provided. Chart 1. graphically illustrates the year to year variation in 10-year treasury bond returns. Chart 2 shows the annual relationship between inflation and bond returns. Chart 3. graphically illustrates the year to year variation in inflation-adjusted annual returns. Note especially, the much greater frequency of negative return years when bond returns are measured in real dollars. Chart 4. shows the cumulative nominal and real return for the 10-year treasury bond (assuming an initial $100 investment) over the period.