Most people get a little confused when thinking about using a U.S. Treasuries as a safe investment vehicle, because there are types types of loans connected to the investment, and each on is called something different based upon how long it takes to mature.

When I mentioned four types of loans, that’s what investing in a U.S. Treasury really is: giving the U.S. government a loan in return for one of the safest investments you can make, being backed by the full faith and credit of the U.S. government.

The government then takes that money and uses it for a variety of purposes.

There are four types of Treasuries to invest in: Treasury bills, Treasury notes, Treasury bonds and Treasury Inflation Protected Securities (TIPS). The first three are distinguished by the duration of the investment, and TIPS are defined by inflation adjustments to the interest on the investment.

Treasury Bills

A Treasury Bill is recognizable from having a maturity date of one year or less. You also don’t have to pay state or local taxes on what you make on it.

The Treasury Bill is also called a T-Bill or U.S. Treasury Bill, which all means the same thing, so don’t get confused there.

Treasury note
 
A Treasury note will mature from between two to ten years, with maturity dates usually set at 2, 3, 5, 7 or 10 years (in other words you can buy them at those intervals).

When you listen to or read about the U.S. Treasuries market, it’s normally the 10-year note that you hear quoted as to where bonds are priced at the moment.

Treasury Bonds

Treasury Bonds are can be bought from between twenty to thirty years to maturity.

Taxes on these are the same as the T-Bill and T-Note, with Federal taxes still applying, but state and local being tax exampt.

Treasury Inflation-Protected Securities ( TIPS)

Also debt issued by the U.S. Treasury, TIPS are unique in that the interest rate adjusts to inflation based upon the Consumer Price Index, which is the primary source used to measure inflation.

TIPS at this time are issued in five, ten and twenty year maturities.

Treasury Strategy

So with these various safe options available, what would be the best one at this time if you’re interested in investing in one of the Treasuries?

Personally I like the TIPS the best, based on the extraordinary amount of debt and deficits taken on by the U.S. government.

With the printing of billions upon billions of dollars, that will eventually lead to huge price increases as inflation rises.

So investing in some of the other Treasuries, especially the more long term ones, could end up eating into your capital based upon the rate of inflation, and you would be stuck with that.

Investing in TIPS would allow your return on capital to adjust with it, making it a highly desirable investment.

One other thing to consider would be how long you want to tie up your money. If you want it to be available at some reasonable time period, a T-Bill might be best for you, and that has some built-in inflation protection just based on the short period of time you would hold it.

Tags: T Bills, T Bonds, T Notes, tips, US Treasuries

This entry was posted on Wednesday, September 2nd, 2009 at 10:59 am and is filed under tips. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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