TREASURY BONDS

Government bonds have stood as a reliable long-term investment for decades, but the idea of “long-term” investing may be taken to a new extreme soon. In early February 2010, the Treasury Borrowing Advisory Committee (TBAC) announced the Fed is considering issuing bonds that mature as far out as 100 years. Well, it isn’t hard to figure out that the odds of outliving a maturity date that far off are slim-to-none.

Why would the Fed consider issuing a bond with a 100-year maturation date and why would anyone even consider purchasing this type of bond?

Have you ever turned over a couch cushion and found a couple dollars in change or pulled a $10 bill out of the pocket of your jeans while doing laundry? Remember the spark of joy you felt, however small, at finding missing money you didn’t even realize existed? Well, just imagine how you’d feel if you found out the government has been sitting on unclaimed money of yours, too, and all you have to do go get it.

That’s the position thousands of people are in and most don’t even know it. In fact, the government has over $33 billion in missing funds that is waiting on owners to claim. Maybe some of it belongs to you.

Treasury bond rates are increasing as the Fed attempts to stimulate the economy with multi-billion dollar bond buys. Unfortunately, ever since its decision to take part in the stimulative quantitative easing program, which involves buying $600 billion worth of Treasury bonds, investors have been pushed toward stocks.

Why the Fed is Buying Bonds

It seems that banks are making a habit of using their free capital to lend money to the government via bond buys, which means that business and personal loans are not being distributed. Fed Reserve Chairman Ben Bernanke is not happy about this action because it means credit is not being extended when it could. But he believes new global banking rules could turn things around.

Banks Take Advantage of Low Interest Rates

Before investing in municipal bonds, it’s good to first explore the advantages and disadvantages of doing so to make sure you’re making the most informed investment decision. But just what is a municipal bond? To help you out, we will explore various pros and cons of this investment tool so that when you’re ready to invest, you’ll feel better prepared.

Municipal Bond Tax Exemptions

Treasury bonds are considered one of the safest, if not the safest, investments in the world because they’re backed by the full faith of the U.S. government. Investors looking for a guaranteed return, or a “flight from risk,” usually flock to Treasuries because they’re basically default-proof.

However, since U.S. Treasury bonds usually don’t mature until at least 10 years, there are some potential drawbacks that you should consider before going out and investing all your money in them. In some cases, you’re better off just leaving your money in a high-yield savings or CD account.

Treasury bonds, often referred to as T-bonds for short, are a form of debt security issued by the United States Treasury Department. They are issued in denominations of $1,000, provide semi-annual coupon payments and have maturities of at least 10 years.

While treasury bonds interest rates are usually quite low in comparison to higher-risk investments, they remain popular due their safety. In fact, treasury bonds are considered to be one of the safest investments in the world because they’re backed by the U.S. Government and therefore present practically no risk of default.

Bonds are debt securities distributed by authorized issuers (business or government entities) that represent a debt owed by that issuer. Similar to a loan, a bond represents a formal contract between the issuer (debtor) and holder (lender), where which the holder gives money to the business to hold. After time has lapsed (i.e. the bond has matured), the issuer is obliged to pay interest (the coupon) and/or repay the principal. This occurs in fixed intervals over a period of time.

Bonds and often associated with stocks because they are both securities; however, there are a couple of major differences between the two. While bonds offer holders a creditor stake because they are lenders for the company, stockholders have an equity stake, meaning they are owners. Another difference is that bonds are based on a defined term (maturity) because since they are simply borrowing external funds to them to finance long-term investments. On the other hand, stocks are usually held indefinitely since the holder has a more permanent relationship as owner.

If investing in a bond interests you then you may want to consider learning more about municipal bonds, which are government-issued debt securities. Also known as “munis” these investment tools are often attractive to investors because they are typically risk-free – at least in comparison to other forms of investment.

Defining Municipal Bonds

Whether you think about it or not, when interest rates rise it affects your life in good ways, and unfortunately, in bad ways as well – want to learn why?

First, let’s start with why interest rates are rising. Interest rates on U.S. Treasury securities are starting to move higher. As the US Government prints more and more money to fuel the bailout, aka the recovery efforts, the dollar can weaken and so can the world’s perception of the United States credit-worthiness. The US Government issues billions and billions of dollars of Treasury bonds each month, and if they are traded at discounted rates, that in turn increases the effective interest rate on those bonds. That is a major driver of interest rates in the US, including mortgage rates, auto loan rates, credit card rates, CD rates, savings rates, etc.