What are ‘Treasuries’?
Treasury securities, also known as Treasuries, are government bonds issued by the United States Treasury Department.
As they are backed by the credit of the US government and have the highest credit rating (AAA) of all debt securities, Treasuries are considered low risk. However, they can be impacted by inflation and changes in interest rates. They make twice yearly interest payments and are considered liquid, which means they can be converted easily into cash.
Treasuries are divided into three categories based on maturity date, Treasury Bills, Treasury Notes and Treasury Bonds.
Treasury bills (T-bills) mature in one year or less and do not pay a coupon rate so are known as zero-coupon bonds. Income is generated by issuing the bond at a discounted price compared to its face value, or par value.
Treasury notes (T-notes) on the other hand, mature in 2, 3, 5, 7, or 10 years and make coupon payments twice a year, either at a fixed or floating rate. The 10-year Treasury is the most notable Treasury as it is used when calculating the slope of the yield curve.
Treasury bonds (T-bonds) are the longest-term bonds and mature in 20 or 30 years. These typically offer the highest coupon payments but since bond prices are inversely linked to interest rates, these are also the most volatile Treasury.
Another type of Treasury is Treasury Inflation-Protected Securities (TIPS) which are indexed to the rate of inflation on a daily basis as measured by the Consumer Price Index (CPI). During periods of high inflation, the price of these bonds climbs, though subsequently the price falls when there is deflation. As with other Treasuries, TIPS also offer a coupon.