Help me understand US Treasury securities.

April 4, 2008 10:18 PM

Help me understand US Treasury securities.

I've invested in the stock market for quite some time. I've recently decided that I want to also invest some money in less risky securities, such as those offered by the US Treasury. I've been investigating, but there are still questions that I haven't found answers for.

Question 1. Is the only real difference between "treasury bills", "treasury notes", and "treasury bonds" the length of time until they mature? I understand that their price and interest rates will differ as well, but that obviously depends on the maturity length. So I guess I mean something along these lines: If the Treasury started offering "30 year treasury notes", under exactly the same rules as their current treasury notes except that they have a 30 year maturity, should an intelligent market value them exactly the same as it would "30 year treasury bonds" offered at exactly the same time?

Question 2. Let's say I use TreasuryDirect.gov (which seems like a good idea). How is periodic interest paid out? I don't mean "when" or "how often"; rather, I mean for example "Does it automatically get plopped back into the bank account that I linked to my TreasuryDirect account?"

Question 3. I use Quicken. Investigation reveals a profound lack of information on how to deal with this stuff in Quicken, but seems to indicate that it can't automatically track your US Treasury securities' values like it can your stocks' values. But this is almost unbelievable. So, my question is: Seriously? Quicken can't deal with United States Treasury securities, except manually? And if the answer is "Yes, seriously", then a followup: How do you personally deal with this?

Question 4. I gather that these things are only sold on very specific days. Do I have to log on to Treasury Direct that day, between some hour and some other, and tell it "Hey, I want some of that"? Or can I just tell it in advance that I want to buy such-and-such an amount of security such-and-such, at the noncompetitive price, whenever it becomes available? If the latter, how far in advance can I do so?

Any other hints that you think might be helpful would also be appreciated. Thanks in advance.

posted by Flunkie to work & money (10 comments total)

Question 2: I managed my I and EE bonds through TreasuryDirect and I think it's a confusing site to navigate, but convenient enough. I don't know about any other securities, but this is how bonds work. The interest does not get plopped into your bank account. TreasuryDirect shows how much interest you've earned, but you don't actually get any of that money until the day you decide to redeem your bonds. At that time, you can electronically redeem them and get the money plopped in your bank account.
posted by HotPatatta at 10:37 PM on April 4, 2008

TreasuryDirect shows how much interest you've earned, but you don't actually get any of that money until the day you decide to redeem your bonds. At that time, you can electronically redeem them and get the money plopped in your bank account.

You mean if I get a 30 year bond, not only is that money inaccessible for 30 years unless I sell prematurely, but also all the interest it generates is inaccessible for 30 years unless I sell prematurely?

They say all over the place that they pay interest semiannually. What is the point of that if you can't access that interest until maturity?
posted by Flunkie at 10:49 PM on April 4, 2008

You're mixing up marketable securities and savings bonds. The US Treasury issues both. Marketable securities pay regular cash coupons on a semiannual basis while savings bonds accrue interest.

The wikipedia article is pretty good.
posted by mullacc at 10:54 PM on April 4, 2008

Er, let me amend that:

Marketable securities pay regular cash coupons on a semiannual basis (unless it's a t-bill, which have maturities less than one year)...
posted by mullacc at 10:58 PM on April 4, 2008

I cashed in all my bonds before maturity and got the interest earned up to that point.
posted by HotPatatta at 10:59 PM on April 4, 2008

OK, so then my question #2 regards marketable securities.
posted by Flunkie at 11:02 PM on April 4, 2008

Question #1: Yes, that's the only difference. It's a definitional difference; the names imply the duration. There could never be a 30-year note; a 30-year bond is called 'the long bond.' If you ever hear anyone talk about 'the long bond' they mean the thirty year Treasury bond, that's just the definition of that phrase.
posted by ikkyu2 at 12:26 AM on April 5, 2008

1. Treasury bills are for terms of 6 months or less. They are sold at a discount to their face value that represents the interest. For example you buy a $1000 bill for $990. At the end of its term you redeem it for the face value to collect $10 interest.

Treasury notes and treasury bonds are the same except for the terms. Notes are 2, 5 or 10 years. Anything longer than 10 years is called a bond. Notes and bonds are sold at face value and pay interest every 6 months.

The longer the maturity, the greater the interest rate risk. If interest rates go up after you buy your security, the longer maturity security will lose more value than the shorter maturity.

2. Interest is paid into your linked checking account.

3. Not sure what you are trying to do with Quicken.

4. Auctions are once a month. You specify what bill, note or bond you want to buy and how much, in $100 increments. When the auction occurs, you get your security. You can place your order as much as a month ahead of time or specify recurring purchases for up to 5 years. Normally you take the non-competitive bid, which guarantees that you will receive your security. The rate is set by the large institutional competitive bidders although the approximate rate is known ahead of time.

Another possibility you might consider that is much simpler is to buy a Treasury bond fund from Vanguard. They handle all of the buying, selling, and reinvestment for you for a cost of only 0.25% per year. For example a $10,000 investment will cost you only $25 per year. You can buy and sell at any time, not just once a month. You can also write checks on your bond fund, although you need to keep in mind that selling bond shares can create capital gains. Vanguard has short, intermediate and long term bond funds that you can mix to achieve the duration that you want.
posted by JackFlash at 12:31 AM on April 5, 2008

1. has already been answered: with a t-bill, you buy at a discount and the bill matures at face value. Your "interest" is the difference between purchase price and face value. With a bond or note, you buy at face value (more or less) and the interest is generated separately; every six months, it gives you a dollop of cash. (The more or less caveat is that there is often a slight discrepancy between purchase price and face value with bonds and notes; this tweaks the effective interest rate slightly.)

2. You can set the options on where the interest goes. It can go to a linked account, or it can go to what's called your "Zero Percent Certificate of Indebtedness" -- basically an electronic cash balance that earns no interest. If you're looking at laddering bills, the latter is usually more convenient than having the cash come in and out of your bank account.

3. I enter into Quicken manually, treating them as bonds like any other. There might be a more efficient way to do this.

4. You can schedule your purchases way in advance... months in advance, at least. When I was laddering bills (I've stopped now that the interest rates are so low), I had them going out for 2-3 months on occasion, and I've put in bids for notes weeks to months in advance. (You can also cancel up until shortly before the auction day.)
posted by cgs06 at 1:19 PM on April 5, 2008

So, my question is: Seriously? Quicken can't deal with United States Treasury securities, except manually?

As far as I can tell, they have no support for it. I have the same incredulous reaction as you, especially since they are always looking for new features to add and advertise. It's not even that it doesn't auto-update; it's that they have very poor support for government bonds in general.

So to track mine, I use the Savings Bond Wizard from the Treasury to keep an inventory and to do a one step update of the values, and then update the Quicken values manually.
posted by smackfu at 6:12 AM on April 7, 2008