Treasury bonds

U.S. Treasury bills and notes are often the first bonds that investors buy, and they make up the bulk of many bond portfolios. One appeal of Treasurys is that they're extremely safe, since they're backed by the U.S. government. Another attraction is that it's easy to buy Treasurys, either online or over the telephone.

All you have to do is open a Treasury Direct account, link the account to your bank, and place your order. The minimum is one bill or note, with a $1,000 par value, though you may invest more. The trade-off for the convenience, safety, and flexibility is that Treasurys pay interest at a lower rate than even the highest-rated corporate bonds.

Treasury notes, with intermediate terms of 2, 5, or 10 years, are popular with investors who want to earn a reasonable rate without making a long-term commitment. Treasury bills, or T-bills, with 4, 13, or 26 week terms, appeal primarily as a place to hold cash reserves.

Treasury inflation-protected securities — also known as TIPS — are inflation-indexed notes. Like traditional Treasurys, TIPS pay a fixed rate of interest for the term. But what makes TIPS different is that the principal value of the bond, to which the interest rate is applied, is pegged to the current rate of inflation. So if inflation rises throughout the term of the bond, the principal grows proportionately — and so does your interest income.

While traditional bonds pay slightly higher rates of interest, the real rate of return on TIPS generally outpaces traditional bonds. Another advantage of allocating some of your bond portfolio to TIPS is that they can lower its overall volatility. That's because TIPS have a low correlation to other types of bonds, since their value isn't eroded by inflation.

	Treasury bills	Treasury notes	TIPS bonds

Par value	$1,000 - $1 million	$1,000 - $1 million	$1,000 - $1 million

Terms	4, 13 & 26 weeks	2, 5 & 10 years	5 & 10 years

Trading details	New: through Treasury Direct Existing: through brokers	New: through Treasury Direct Existing: through brokers	New: through Treasury Direct Existing: through brokers

Risk	Very safe	Very safe	Very safe

Interest	Federally taxable	Federally taxable	Federally taxable

Call provisions	Not callable	Some are callable	Sometimes callable

Rated	No	No	No

Alexandra Lebenthal, President and Chief
Executive Officer of
Alexandra &
James, Inc.

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