Buying Treasury Securities in an Uncertain Economy

In a down economy, Treasury securities offer a safe place to put your money. Most of Uncle Sam’s debt is made up of marketable (tradable) securities: Treasury bills, Treasury notes, Treasury bonds, and TIPS. Like savings bonds, each of these securities is backed by the full faith and credit of the government:

• Treasury bills (T-bills): T-bills are short-term, highly liquid securities that mature in one year or less. They’re similar to a savings account or a money market fund. You can buy them at less than face value and receive the full-face amount when the bill matures.

  
  



• Treasury notes (T-notes): T-notes are intermediate-term investments with maturities of more than one year but less than ten years. You can probably expect to earn a somewhat higher interest rate on T-notes than on T-bills. The notes pay interest every six months. They’re the most popular Treasury securities because they offer a good mix of the safety of short-term investments and the higher yields of long-term bonds. Investors often use them to fund specific future expenses, such as college or retirement income.

  
  



• Treasury bonds (T-bonds): T-bonds are long-term investments with terms between 10 and 30 years; they pay interest every six months. Because they’re long-term issues (and investors assume more risk with a fixed-income, long-term investment), they typically pay a higher interest rate than T-notes or T-bills.

  
  



• Treasury Inflation Protected Securities (TIPS): TIPS are government-issued bonds whose principal amount adjusts to the rate of inflation. Both the interest payment and the principal face value of TIPS are affected by changes in the consumer price index (CPI). Because the principal is indexed to the CPI, if the index rises during periods of inflation, your principal and interest are guaranteed to increase; therefore, the real purchasing power of the investment keeps pace with the rate of inflation. If deflation (a reduction in the general level of prices) occurs, TIPS are guaranteed to pay at maturity the greater of the original face value of the bond or the inflation-adjusted value.

  
  

  So what’s the downside? Because of their built-in inflation protection feature, the interest rate on TIPS tends to be lower than on other Treasury notes or bonds.

  
  

dummies

Source:http://www.dummies.com/how-to/content/buying-treasury-securities-in-an-uncertain-economy.html