Treasury
Market Basics
U.S.
Treasury securities,
such as bills,
notes and bonds,
are debt obligations
of the U.S.
government.
Because these
instruments
are backed
by the “full
faith and credit”
of the government,
U.S. Treasury
securities
are considered
one of the
safest investments
in the world.
They are viewed
in the market
as having no
“credit risk”,
which means
that your principle
and interest
is almost guaranteed
to be paid
on time.
Because
of this unique
degree of safety,
the interest
rates are lower
than other
types of debt
instruments.
But this does
not mean that
their prices
do not fluctuate.
The Treasury
market is the
most liquid
debt market
in the world.
Trading in
U.S. Treasury
instruments
occurs 24 hours
a day all over
the world.
Market
Risk
While Treasury
securities
are considered
credit risk
free, they
are affected
by other types
of risk. There
are two major
risks that
affect a debt
instruments
price, interest
rate risk and
inflation risk.
It is these
risks that
cause the underlying
value of debt
instruments
to change depending
on the direction
of interest
rates.
As
with all fixed
income instruments,
if interest
rates are rising
then the price
of the instrument
generally will
fall as new
instruments
come into the
market with
a higher interest
rate. Conversely,
if interest
rates are falling,
the value of
the higher
paying instrument
will rise in
comparison
to the newer
lower interest
rate issues.
The
Trading Market
Treasuries
can be bought
and sold though
an investment
professional
or the Federal
Reserve directly.
When you purchase
bonds directly
from the Federal
Reserve, you
must buy new
issues, this
is known as
the primary
market. The
Treasury holds
regularly scheduled
government
auctions four
times a year:
the first weeks
of February,
May, August,
and November.
You can enter
competitive
bids for Treasury
securities.
You
can also purchase
U.S. Treasury
bonds on the
secondary
market.
When bonds
are first issued,
their prices,
or face values,
are fixed.
Once issued,
these prices
can fluctuate
in the secondary
market due
to changing
interest rates.
Older bonds
are sold through
brokers on
the secondary
market. The
government
unit that issued
the bonds plays
no role in
trading on
the secondary
market. Nor
does it receive
any profits
from these
transactions.
Since
a debt instrument’s
market value
is directly
related to
interest rates,
until a bond
matures, its
price on the
secondary market
constantly
changes in
response to
changes in
interest rates.
If you sell
your bond before
it matures,
the price may
be more or
less than you
originally
paid for it,
depending on
current interest
rates. This
fluctuation
creates opportunities
for astute
investors who
time the market.
An
Investor's
Guide to U.S.
Treasury Securities is
a pdf file
that clearly
explains the
full range
of securities
issued by the
U.S. government.
The guide shows
investors the
role of treasuries
in their portfolio;
the different
products offered
by the U.S.
Treasury including
notes, bonds,
inflation-indexed
securities,
strips and
savings bonds;
information
on market risk;
and yield and
price information.
It also includes
a section on
how to read
the newspaper
to determine
prices and
yields and
has a complete
glossary of
terms for easy
reference.
Conclusion
For investors
looking for
safety, predictability
and liquidity,
Treasury
instruments
offer a range
of benefits
suited to
those objectives.
And because
of the market’s
size, security
and demand
by other
investors,
Treasury
securities
represent
the most
liquid capital
investment
in the world. |
