Treasury bonds are an investment and the U.S government issues the treasuries as debt obligations. The probability of going wrong with this investment is almost zero. This is because the financial risk involved is relatively low. However, it is because of this that they offer low yields. If you are looking to reduce risk and guarantee yourself some return, this is a venture you may want to consider. Treasury bonds are existent in two formats, paper certificates, or electronic entries.
You need to understand the benefits and advantages of venturing into treasury bonds. In addition, you will also learn the determinants of the Treasury bond rates as well as the types of bids available for purchasing a treasury bond.
Why venture into treasury bonds?
There are a number of advantages of going into treasury bonds as opposed to other bonds or other modes of investment. These include:
They are highly liquid.
In reference to liquidity, treasury bonds are active and thus, are bought and sold on a daily basis. This feature makes them liquid, as institutions, individuals, as well as foreign governments are part of the frequent trade. This advantage ensures that you can liquidate your U.S treasury bonds fast and easy without too much hassle. This makes them ideal as you can retrieve your monies worth in case of an emergency.
Unlike trading in other financial ventures, bonds come with low risks if any, are therefore, safe, and offer a guarantee in its returns. However, this affects their yield curve, as the returns are not as high as compared to high-risk investments.
They are of high credit quality
Many prefer this advantage, as they get better over time. The credit quality is high with the backing of the U.S government. This comes in handy especially with the government’s taxing power as well as with the current strength of the U.S economy. Chances are that your investment is secure.
The more time you allow the investment, the better the yield curve. It is advisable that when you invest in treasury bonds you should at least consider the 10-year treasury because the 10-year treasury rates are higher as opposed to short-term U.S treasury rates. These go hand in hand with the 10 year Treasury note (TNX) in reference to the credit quality as provided by the government.
Treasury bonds offer a given rate depending on the duration of the investment as well as the total amount invested. In this, the rate varies depending on varying determinants. The key advantage here is that the interest earned from the rates provided is not subject to state or local income taxes. Keep in mind however, that they are subject to federal income tax.
What determines the Treasury bond rate issued?
The Treasury bond rate is not the same at all times. Sometimes it varies from one individual to another and sometimes it is different depending on the duration of investment. There are several factors to consider when receiving a Treasury bond rate. You need to consider the rates before you can settle for a given purchase. The Treasury bond rate determinants include:
The duration of the treasury plan/ investment
Treasuries allow you to make the choice of investing your funds to maturity from about 10 years all the way to 30 years. It is important to note that the longer the maturity time, the better the treasuries rates/ coupons. This is because there is more time to trade with your funds and thus more returns for the individual as well. Once this duration is complete and the treasuries mature, payment is automatically made to the bidder unless different instructions are dictated from the bidder himself.
The amount deposited on the investment
It is evident that in every investment, the more you put into it with all other factors held constant, the more likely you are to increase the yields even over a shorter period. This also helps negotiate as it increases your bargaining power. This is noted especially when institutions and other governments are trading or making similar investments.
The current economy
The state of the economy is very important when providing the rates. When the economy is more stable, the rates tend to be better as opposed to when the economy is weak. In this, it is important to consider the current economy state.
What are the types of bids for purchasing a treasury bond?
There are different ways to purchase a treasury bond from biding. There are two types of bids you can choose from when seeking to purchase a treasury bond. These include:
A non-competitive bid refers to the provision of the bond to the bidder. However, the bidder must agree to the provided rate on the table. They are termed “non-competitive” because the bidder is guaranteed the bonds but must agree to the set rate. When a bid is non-competitive, the provided maximum purchase amount is normally $5 million.
In reference to a competitive bid, the bidders will be provided with the possible rate they are willing to agree to. However, it is not as easy as that as the rate the bidder decides to consider must not be too far from the set rate on the table. When a bid is competitive, it provides for about 35% of the offering.
Looking at the advantages and benefits that come with treasury bonds, there is no doubt that it is a long-term investment with guaranteed returns. However, the returns may not be very high as the Treasury bond rates are not high. The risks attached that may affect the rates offered include the fluctuating inflation, credit risk, and the lower yields. By understanding the factors affecting the Treasury bond rates, you will make ideal decisions based on when to purchase these treasuries. Looking at the treasury yield curve, it is evident that the longer the duration you allow your investment, the higher the interest rate. Bottom line is that treasury bonds are a good investment with long-term benefits though you may require some patience.