Advantages and Disadvantages of Treasury Bonds

Explore diversifying your portfolio with government bonds.

Investment bonds can be a good place to put your money if you’re learning how to invest for the long haul. To get familiar with U.S. Treasury bonds so you can make an informed decision on whether to include them in your investment strategies, read on to learn what they’re all about — and how to use bonds to diversify your portfolio.

What Are Treasury Bonds?

A Treasury bond is basically a long-term security issued by the U.S. Treasury that features a 30-year, fixed maturity and requires a minimum investment of $100. Treasury bonds fall under the umbrella of U.S. Treasury securities, which include T-bonds, U.S. Treasury notes, Treasury securities and government bonds. The U.S. Department of the Treasury issues these securities to raise money the federal government uses to run its operations.

Don’t confuse Treasury bills with Treasury bonds. T-bills are shorter-term investments than Treasury bonds and are typically sold in terms that range from a few days to 52 weeks.

Each T-bond shows the Treasury bond rate — or interest rate — on it, and you’re paid interest semiannually. You can redeem the bond for its face value when it reaches maturity or you can sell it before it matures if you’re willing to pay penalty fees. The difference between Treasury bonds and U.S. Treasury notes is simply the amount of time until they reach maturity.

Read: How to Buy Treasury Bonds for Investment

Advantages of Treasury Bonds

Putting your money into Treasury bonds comes with pros and cons. Understand the advantages and decide if T-bonds are right for your financial strategy.

In addition to having no maintenance fees, Treasury bonds feature:

  • Guaranteed rate of return: You’re guaranteed a certain rate of return on your investment.
  • No value loss: Treasury bonds are considered extremely safe investments — because the government backs your principal investment, your money will not lose value.
  • Tax exemptions: You don’t have to pay state or local income tax on the interest you receive every six months.
  • Good for retirement: Because T-bonds are typically safer than stocks, you might find them useful if you’re looking toward retirement. In addition, they can help generate a steady stream of income through interest payments.

Disadvantages of Treasury Bonds

Although Treasury bonds are among the safest investments you can make, they have some drawbacks. For example, this investment might not be right for you if you want quick returns.

Some other disadvantages of Treasury bonds include:

  • Long-term investment: You might have to wait up to 30 years for this U.S. bond to mature.
  • Restrictions and penalties: Restrictions and penalties might be associated with redeeming Treasury bonds before they mature.
  • Tax liability: Although you don’t pay state or local taxes on the interest your bonds generate, the interest is subject to federal income tax.
  • Buying limits: If you purchase your bonds through an auction, you can buy only up to 35 percent of the initial offering amount.

Don’t Miss: Are Bonds Safe and FDIC-Insured?

Buying Treasury Bonds

Bidding on Treasury bonds came about in 1963, and security syndicates and banks were able to buy them competitively. Today, the Treasury auctions 30-year bonds during four months of the year: February, May, August and November.

You can buy a noncompetitive-bid Treasury bond through a broker, dealer, bank or via TreasuryDirect.gov. If you buy TreasuryDirect bonds, you can handle most of your transactions online, including buying the bonds, reinvesting them and maintaining your account. You don’t have to pay any maintenance fees on these bonds, which is a plus.

If you’re in for the long haul and want a guaranteed rate of return with no value loss from an investment, a T-bond might be a perfect solution. But if you don’t want to wait 30 years for the bond to mature — or likely pay penalties if you redeem it early — you might want to look at some shorter-term investments.