The United States Treasury is the largest issuer of fixed income securities in the world. The total value of securities issued by the US Treasury is exactly equal to the national debt, which currently stands at $19.8 Trillion. US Treasury bonds are backed by the full faith and credit of the United States Government, and are therefore treated by investors as a riskless investment. Because of the low levels of risk associated with Treasury securities, they also offer low rates of interest.
Bills are short-term government securities, with maturities of 4 to 52 weeks. Treasury bills are issued at a discount and redeemed for full par value at maturity. The difference between the discount price and the full value represents the interest paid on the bills. Treasury bills do not have coupons.
Treasury notes are the medium-tenor government security, with maturities of 2,3,5,7 and 10 years. The 2 and 10-year notes are the benchmark maturities for government debt. Interest on Treasury Notes is paid semi-annually in the form of coupons.
The treasury bond, also known as the “long bond” has a maturity of 30 years. Long bonds also pay interest semiannually. The value of the 30 year bond is highly sensitive to changes in inflation.
Inflation and Interest Rate Risk
Although there is virtually no repayment risk, Treasuries are subject to the risk that the guaranteed payments will become less valuable over time. Coupon payments are a fixed dollar amount, and if the rate of inflation rises each dollar will have less purchasing power over time. There is also the risk that interest rates will rise, and investors locked in to a long-maturity bond will not have the ability to transfer over to the higher-yielding asset.