Know about Treasury Bonds
What are treasury bonds?
Treasury Bonds or Treasury Bills are financial instruments for a short-term basis. A treasury bond is issued by the US Treasury with a maturity period of one year (52 weeks). They are safe and dependable investments since it is regulated by the United States Government. It is exempt from both state and federal taxation. When an investor invests in treasury bills they lend money to the government where the government uses the money to pay for military equipment and salaries. They are sold in dominations. However, the treasury bonds are not benefited equally by everyone, and they have certain advantages based on age. In this article, we have given detailed information about treasury bonds.
How to purchase treasury bonds?
Auctions
With bidding auctions, the investors can buy the treasury bonds at a more discounted price than usual. With every bid, it states the lowest rate or the discounted prices that a bidder wants to accept. The lowest rate is accepted fast. If there is not a bidder available for that particular price, the next lowest rate is accepted and the process continues until it is not purchased by a bidder. The payments are done either with a bank or broker.
Non-competitive Bid
If there is no bidding process available, the investor has to pay the determined price at the auction. The investor receives the average price of treasury bills that sold in the auction, and this is one of the legal and safest methods since they are guaranteed and receive the full bill of the maturity period. The treasury bonds payments are done through Treasury Direct, bank, or broker.
Secondary Market
An investor can buy treasury bonds from the secondary market, also can also sell their treasury bonds. There are mutual funds and exchange-traded funds that hold the previous treasury bonds.
Factors Affecting Treasury Bonds Prices.
There are various factors that affect treasury bonds, such as monetary policy, maturity period, risk tolerance and inflation.
Monetary Policy
Monetary policy affects the bonds. Treasury bonds interest rates move to Fed interest rates. (Federal Funds Rate) If the federal funds rise, it invites other investments that result in a drop in treasury bonds since the demand gets lower. The drops continue until the T bill rises above the federal funds rate.
Maturity Period
Even the maturity period affects the price. A one-year treasury bond has a higher rate of return than a three-month treasury bond. Longer maturity periods increase the risk for the investors. There is one year, three months, six months, and a twelve months treasury bond rate. For a longer period of time, the investors demand a higher rate of return.
Risk Tolerance
When the US economy has an expansion and the other securities invite higher returns, the demand for treasury bonds decreases resulting in lower prices, while the volatile economy makes the treasury bonds safer and the debt securities become riskier.
Bottom Line
Treasury bonds are indeed the safest bonds available, as they are backed by the US Government. However, there are some downsides such as the factors affecting the prices are lowered based on the nation’s economy.
