Key takeaways
- Treasury bonds are government securities that pay a fixed interest rate every six months.
- A Treasury bond’s coupon rate – or interest paid – stays fixed for the life of the bond, but the bond’s price can change if traded on the market.
- Treasury bonds are considered safe investments because they are backed by the U.S. government, but Treasury bonds still face interest rate and inflation risks.
Treasury bonds are government securities that have a 20-year or 30-year term, and they pay a fixed interest rate on a semi-annual basis. They earn interest until maturity and the owner is also paid a par amount, or the principal, when the Treasury bond matures. This interest is exempt from state and local taxes, but it’s subject to federal income tax, according to TreasuryDirect.
Treasurys are marketable securities, so they can be sold before maturity – unlike U.S. savings bonds, which are non-marketable securities and are issued and registered to a specific owner and can’t be sold in the secondary financial market.
What Treasury bonds pay in interest
Let’s run through an example of how Treasury bonds work and what they could pay you.
Imagine a 30-year U.S. Treasury Bond is paying around a 3 percent coupon rate. That means the bond will pay $30 per year for every $1,000 in face value (par value) that you own. So the semiannual coupon payments are half that, or $15 per $1,000.
Interest payments are made directly into your TreasuryDirect.gov account, if you use it to hold your securities. If you hold your bonds at a brokerage, then the interest payment will go there.
The yield on 30-year Treasury bonds is around 4.25 percent, as of September 2024.
When a Treasury bond is issued, the coupon rate stays fixed for the life of the bond, but the bond’s price can change as it’s traded in the market. If the bond price goes up, then its yield goes lower, even though the coupon rate remains the same. Conversely, if the bond price falls, the yield will go up, even though the coupon rate remains the same. Either way, when the bond matures, you’ll receive the face value of the bond back.
If the coupon rate is higher than the yield, that means the bond is selling at a premium, says Greg McBride, CFA, Bankrate chief financial analyst.
With a stock, you know what the price is today but you don’t know its future value. But with a bond you know what the end value is going to be when it matures, McBride says.
“If the price now is above the face value, then your yield is going to be less than the coupon rate because you may have paid $110 for the bond, it’s going to mature at $100,” McBride says. “Conversely, if you buy it for less than face value, your yield to maturity is going to be higher than the coupon rate. Because at maturity, that bond you paid $95 for is now going to give you $100.”
How to buy Treasury bonds
Investors have two major ways to buy Treasury bonds:
- Buy new bonds straight from the U.S. Treasury, a bank or a broker
- Buy existing bonds from the bond exchange through a bank or broker
You can buy Treasury bonds electronically from TreasuryDirect through non-competitive bidding. Non-competitive bidding involves accepting the determined yield at auction and guarantees that you will receive the desired amount and specific bond. On the other hand, competitive bidding allows you to specify the yield you are willing to accept, but there is no guarantee that you will receive the bond you want, and the amount may be smaller than requested.
Treasury bonds can be purchased through banks, brokers, or dealers via competitive or non-competitive bids. Auctions for Treasury bonds occur four times a year, and the purchase must be a minimum of $100 in increments of $100. The maximum amount that can be purchased in a single auction is $10 million for non-competitive bidding or 35 percent of the initial offering amount for competitive bidding.
Investing in Treasury bonds is suitable for those seeking safety and stability in their investments. Treasury bonds are backed by the U.S. government and are considered a safe-haven investment during times of market volatility. They can also help diversify a portfolio and reduce overall risk, especially for those heavily invested in stocks.
While Treasury bonds are relatively safe, they do carry risks such as inflation and interest rate risk. Inflation can erode the purchasing power of the bond over time, and interest rate changes can impact the bond’s price if sold before maturity. Investors should consider these risks before investing in Treasury bonds.
The interest rates on Treasury bonds can vary, with some securities offering higher yields due to inflation or other factors. Investors looking for higher returns may consider corporate bonds, but these come with added risks compared to Treasury bonds. Other options like Treasury Inflation Protected Securities (TIPS) are also available for investors seeking to preserve their purchasing power.
Ultimately, whether Treasury bonds are a good investment depends on individual financial goals and risk tolerance. For those seeking safety and stability, Treasury bonds may be a suitable option. However, for long-term goals or higher returns, other investment options may be more appropriate. Consider your financial situation and objectives before investing in Treasury bonds.
Your funds are safeguarded in the event of a bank failure as long as they fall within FDIC limits and guidelines.
High-yield savings accounts offer an annual percentage yield (APY) that reflects the current interest rate environment. These accounts provide quick access to cash, while laddering CDs can help you potentially benefit from rising interest rates. For those seeking higher long-term returns, investing in stocks or stock funds may be necessary. These types of investments are often considered among the best options for long-term growth, allowing you to keep pace with inflation and increase your purchasing power over time.
Frequently Asked Questions (FAQs)
Note: Bankrate’s Rachel Christian and Logan Jacoby also contributed to this article.