For new investors, the world of finance can appear daunting. But among the sea of investment options, Treasury bonds (often just called “Treasuries”) are a pillar of stability and reliability. In this beginner’s guide, we’ll delve into the ABCs of Treasury bonds, why they are often considered the bedrock of the financial system, and the different kinds available to investors.
At its core, a Treasury bond is a loan from you, the investor, to the U.S. government. When you purchase a Treasury, you’re essentially lending money to the government. In return, the government commits to pay back the full amount (the principal) by a specific date, plus a fixed interest rate along the way.
Treasury bonds are one of the main ways the U.S. government finances its operations, from infrastructure projects to paying off older debt. They have been issued since 1917 when they were called “Liberty Bonds” and used to finance the nation’s participation in World War I.
The Financial System’s Bedrock
The Department of Treasury issues Treasury bonds. They are debt guaranteed by the U.S. government, as laid out in the Constitution in Article I, Section 8, Clause 2. The U.S. has never defaulted on its debt, so these bonds come with very little risk of default.
Treasurys are highly liquid, meaning investors can easily convert them into cash with minimal market impact. According to the Securities Industry and Financial Markets Association, year to date through September 11, 2023, their average daily trading volume exceeded $750 billion. ETFs make liquidity even more accessible for retail investors, who can purchase a portfolio of bonds on exchange rather than transacting for individual ones with a broker.