What Are Treasury Securities?

The United States is the largest economy in the world accounting for about 25% of the world output. It is estimated that US citizens own about 30% of global wealth. The US federal government has a budget of six trillion in 2022 with expected tax receipts of four trillion. The government finances the difference in part by selling various types of securities called treasury securities.

Different Types of Treasury Securities

There are two main types of securities - marketable and non-marketable. The marketable securities can be sold in a secondary market and are the ones owned by corporations, institutions, and foreign governments, central banks. The second type of security is the non-marketable security that is attached to a social security number. It can’t be traded or transferred to another person. These are bought by individual investors and there is a limit of 10,000 USD for electronic bonds. There are two types of bonds an individual investor can buy - EE bonds or I bonds. EE bonds are guaranteed to double in value in 20 years and can be bought in increments of 25 dollars to 10,000 dollars. I bonds are inflation-protected bonds where the interest rate resets twice a year. The I bonds can be bought in increments of 25 $s to 10,000 $s. One can buy both marketable and non-marketable securities through treasurydirect.gov.

Bond Funds

There are many treasury bond funds and ETFs. There are some available through Fidelity, Vanguard, and others. These funds fluctuate in price widely and the holder can see large swings in price. The price swings are typically due to interest rate changes which are not predictable or manageable by individual investors.

Buying Bonds

While bond funds trade in the open market and can be bought, sold like stocks; the EE bonds and I bonds can only be bought from the US treasury at treasurydirect.com. EE bonds currently offer an interest rate of 0.10% if bought before Oct 31st, 2022. The I bonds offered a yield of 9.62% if bought before Oct 31st, 2022. The current interest rate is yielding 6.89% for I bonds starting in November. While inflation has been trending down, it still remains elevated compared to the recent past and I bonds offer far higher interest rates compared to other fixed income securities.

Pros and Cons of Buying Bonds From Treasury Direct

First, let us cover the cons of buying bonds from the government. The EE or I bonds can’t be sold before a year. If they are sold after a year, but before five years, one forfeits three months of interest. The interest is taxable as common income and typically varies by the tax bracket. This can make these bonds not attractive to people at higher tax brackets. Since one has to pay taxes, the eventual return on I bonds will be less than inflation.

On the pro side, the bonds are solid instruments and are pretty much guaranteed to make money. EE bonds are guaranteed to double in 20 years irrespective of the interest rate situation. I bonds will never yield less than 0% even if there is deflation. In a diversified portfolio, one can also use these bonds as an alternative to cash that can be used in emergencies. Increased inflation rate is making the federal reserve take aggressive action causing declines in the stock market. I-bonds also compound semi-annually tax free till withdrawal. At this time, I-bonds are attractive to individual investors as they offer better interest rates than the banks and have seen a huge influx of money.

More Reading and Reference

https://www.treasurydirect.gov

Investing is a very large part of building wealth for one's future, but how do you do it? A key to long term investing is being very patient, since you can never predict the future with 100% certainty. For example, if a stock you are investing in is beginning to go down, panic selling may not be the best action to take. The stock could resurface and go higher than before, so waiting some time before doing anything is important. 

In addition, for any investment one makes, waiting for an opportunity to buy instead of buying immediately can provide better returns. If an investment is at a value of 100 and is predicted to go up to 120, waiting to see if the investment will go down before going up (the investment dips to 90 before going up to 120) would increase returns by 10. However, the investment itself isn't the only thing one should consider while investing for the long term. In the words of late investing legend Charlie Munger, "[B]uy a great business when it is worth $1.25 dollars when it is currently worth $1 but will be worth $15 in 10 years." 

While investing for the long term, one must ensure that their investment remains consistent and doesn't plummet in price. So, analyzing investments and being patient before investing is key, and this principle is even more important while investing for one's future. One way to analyze investments is by looking at company financial statements. These can be income statements (how much money a company makes), cash flow statements (how a company's money is gained and used), or balance sheets (what assets a company has). Another way to analyze investments is by looking at the past of that investment in order to draw a line and predict where the investment will go. 

The most important point to consider is to take time and give yourself time to think. If you make a decision while angry, sad, or scared, your judgment can be skewed towards one direction or another. So, if you feel uncertain about investing, give yourself time to calm down and come back later. Investments also take a lot of time to gain a lot of value. A stable, long term investment will most likely not have large profit margins, so letting an investment breathe and gain value overtime is key

Please Note:

I am not a financial advisor and all views expressed in this article are my opinions and is not financial advice.