Margarita M. Phillips 
As the stock market continues its depressing spiral into a bear market (marked by deep and prolonged price declines), many investors are exploring new options for their hard-earned cash. Although many people will maintain their investments in the stock market because hopefully it will eventually recover, others are diversifying into Treasuries and bonds as safer investments. While many people have heard of these investment options, many of us aren’t quite sure what they really are, how they make money, and what’s the difference between them anyway.
Treasury bills and bonds are part of a group of securities used as “debt instruments”. According to the US Treasury Department, these securities are issued by the agency to generate the funds needed to run the federal government. So if you’re buying a treasury bill or a bond, you’re basically paying part of the US government.
One of the first things to know about Treasuries and Treasuries is that they are less risky than stocks because they are backed by the US government.
“Treasury bills and treasury bonds may be suitable for investors seeking income from a high-quality investment with low risk of loss,” says Brian Therien, senior fixed-income analyst at the firm. Edward Jones investment. But this reduced risk comes at a price, he explains. “It’s still a low return compared to other investments.” So you wouldn’t want to put all your money into it. “You want to make sure you have an appropriate allocation,” says Therien, noting that an investor who over-allocates to Treasuries, for example, might not get the return on investment they need.
The fundamental difference between treasury bills and bonds is the length of time they must be held. Treasury bills mature in one to 10 years from their date of issue. Bonds mature in more than 10 years from their date of issue. (“Maturity” means an investor gets their money back.) The longer the maturity period, the higher the interest rate.
For the purposes of this article, we’ll be talking about Series I Savings Bonds, which are very popular right now. In fact, the Treasury Department sold $17.5 billion worth of it for the six months ending May 2022, compared to $364 million for all of 2020, The Washington Post reported.
How much interest is earned?
When a treasury bill is purchased, the interest rate is fixed at the time of issue. Then the interest rate is paid semi-annually until maturity, Therien says. Thus, approximately every six months, the buyer receives an interest-based cash payment.
The interest rates for the I bonds are calculated twice a year on the basis of the prevailing interest rate. I Bonds are also paid differently. Instead of regular payments, interest is added to the bond balance, so that it increases over time. When Bond I is finally repaid, the investor will receive a lump sum that includes the initial investment, plus accrued interest.
Just because I bonds take 30 years to mature doesn’t mean you should hold onto them that long. The minimum holding period for these securities is at least 12 months, explains Thérien. “After that, if you redeem them before five years, you lose three months’ interest as a penalty,” he adds. It is therefore in the investor’s interest to play the long game with these securities. However, with treasury bills there is no minimum holding period, so they can be sold the very next day, if the investor wishes.
Some people are eager to buy securities right now because interest rates are higher than they were six months or a year ago, Therien says (in June 2022, the rate of a Treasury bill is 3%). However, he is quick to point out that the rate is actually not that high relative to history — in 2000, it was over 6%; in the early 1990s, it was over 8%; and the 1980s saw rates above 15%! “So it’s higher recently, but definitely not historically high,” says Therien.
I bonds, however, currently pay an interest rate of 9.62% (confirmed until October 2022), the highest yield since their introduction in 1998. The reason the rate is so high is that the I bonds are inflation protected and inflation was 8.6. percent in May 2022.
The interest rate of bond I is a combination of fixed and variable rates. The fixed rate is currently 0.0% and changes annually. The variable rate is 4.81% and changes every six months. By multiplying 4.81 by 2, you get an annual rate of 9.62%. The Treasury Department offers an interest calculator to determine what you’ll earn over time.
Purchase of treasury bills and bonds
Bonds and notes can be purchased through the US Treasury. However, treasury bills can be bought and sold through various channels, including dealers, banks, and brokers. “There is a very large market for these products,” says Therien. The reason treasury bonds are sold so often is that prices go up and down all the time.
I bonds, however, represent a potentially much longer commitment, as they cannot be sold to other parties and are not transferable. “You can only [buy and] buy them back through the Treasury,” explains Thérien. “There is no market where they can be traded or sold.
The amount a person can buy from each is also different. Treasury bills can be purchased in $100 increments starting at $100 and up to $5 million. The maximum purchase amount of I bonds per individual is $15,000, says Nilay Gandhi, senior financial adviser at Vanguard Personal Advisor Services. “$10,000 for electronic limits and an additional $5,000 for paper bond limits,” he adds. Paper bonds are purchased when people choose to receive their tax refund in the form of I bonds, Therien says, adding that I bonds can also be given as gifts up to $10,000.
Anyone interested in investing in Treasury Bills, I Bonds or other securities should visit TreasuryDirect for more detailed information or consult with a licensed financial adviser. (Note that setting up the account on the TreasuryDirect website can take a lot of patience. And if you try to call the customer service number, you may be told that the wait time to speak to someone is two hours due to current high demand.)
This article should not be construed as financial advice.
