The federal government provides many services and builds essential infrastructure allowing the U.S. economy and American society to thrive. Of course, this requires significant resources and capital which the government must find through one way or another. One method the federal government utilizes to procure the cash it needs to maintain operations is through issuing debt. There are three types of debt issued by the federal government: bonds, bills and notes.
Savings bonds from the U.S. federal government are long term investment vehicles registered to a single owner and are not transferable. By purchasing a U.S. bond, you are loaning the federal government money in exchange for interest payments for durations of either 20 or 30 years. One type of savings bonds is the Series EE which are guaranteed to double within 20 years after issuance. Another type of savings bonds is the Series I which have a fixed rate of interest plus a variable rate based upon the Consumer Price Index (CPI), therefore protecting against inflation.
Another debt instrument which enables the federal government to raise capital from investors is the treasury bill. These are short-term debt instruments that do not pay interest but are usually sold for less than face value or par value. This means you would purchase the instrument at less than its full value but would receive its full value upon the date of maturity. The duration of a treasury bill varies between four weeks and 52 weeks.
Treasury bills, otherwise referred to as T-bills can be purchased through a bank, broker or the TreasuryDirect.gov website. Due to the low risk level, T-bills are some of the most liquid securities in the global markets.
Similar to savings bonds, treasury notes are debt instruments which pay interest to the investor. However, treasury notes, also known as T-notes, are shorter-term investment vehicles. T-notes are available in maturity terms of two, three-, five-, seven- and 10-year periods. You will be paid twice per year based on a fixed interest rate until the date of maturity for the T-note.
T-notes can be purchased through a bank, broker or the TreasuryDirect.gov website. The government holds auctions to sell T-notes. The buyer can choose to enter a competitive bidding process or agree to purchase in a non-competitive bid which means they will purchase at the yield decided via auction.
Should you invest in U.S. government debt?
There are various advantages to investing in U.S. government debt instruments. There is low risk of loss since the U.S. government has massive amounts of resources to ensure the loans are paid back to investors. However, with low risk comes lower reward since the interest paid is less than other potential return on investments from other types of investment vehicles such as stocks. Therefore, it really depends on your own investment goals and how much risk you are willing to take.
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.