Treasury Bonds

Few things in the investing world are considered virtually free of risks, and high on that short list are Treasury bonds.

Treasury bonds are debt issued by the U.S. government. They are issued in $1000 denominations and mature in anywhere from three months to 30 years. For investors, Treasury bills (which mature in three months to a year), notes (maturing in two to 10 years) and bonds (maturing in 30 years), serve two very important functions. First, as an investment opportunity, they offer fairly low but secure return rates, or yields. Second, Treasuries, especially the benchmark 10-year Treasury note, serve as a primary indicator of interest rates, which are a major influence on the overall economy.

First, let's examine Treasurys as an investment opportunity. Treasury bonds are considered the ultimate in safety; the risk of default is practically nonexistent. During times of uncertainty in the stock market, investors often take money out of stocks and put it into Treasuries, which is often called a flight to quality. In addition to the comfort they provide, Treasuries also outperform other, higher-yielding bonds during times of economic weakness and the interest payouts are exempt from state income taxes.

How does one gauge how Treasury bonds are performing? By a Treasury's price and its yield, which move inversely to one another. When they are first offered, Treasury bonds are sold at par, or 100 cents per dollar of face value. But subsequently, they may be bought and sold in the market at prices below or above that level, depending on current interest rates, or yields. The higher the price paid for a Treasury, the lower its yield. The lower the price paid, the higher the yield.

Market watchers also keep a close eye on Treasuries as a proxy for all U.S. interest rates. Until recently, the 30-year Treasury bond, also called the long bond, was considered the benchmark for interest rates. But the government's debt-reduction programs have made 30-year bonds relatively scarce, skewing their role as a broader barometer. So, the 10-year note has become the benchmark.

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