Understanding Treasury bonds: Definition, benefits, and investment methods

Investors planning for retirement often face a familiar challenge: how to pursue growth without taking on more risk than they can comfortably handle. Stocks offer strong long-term potential, but their volatility can make withdrawals stressful during market downturns.

Treasury bonds provide a stabilizing counterbalance. These long-term U.S. government securities are often paired with stocks, annuities, and other fixed-income assets and government bonds to build a diversified investment portfolio. Many investors also compare annuities vs. bonds when deciding how to balance income and stability.

This article explains how Treasury bonds work, how to buy them, and how they differ from other government-backed investments.

What is a Treasury bond?

A Treasury bond (also called a T-bond) is a long-term debt security issued by the U.S. Department of the Treasury. When you buy one, you’re lending money to the government to help finance its operations in exchange for fixed interest payments called coupons, paid by the government twice annually. At the end of the bond’s term, you receive your entire principal back in full. 

Because they’re backed by the full faith and credit of the U.S. government, Treasury bonds are widely considered to be a low-risk investment. Many retirees rely on them for their steady interest payments and the sense of stability they add to a retirement portfolio.

How to invest in Treasury bonds: 3 ways

There are three main ways to purchase Treasury bonds, and understanding the differences can help you choose the approach that best aligns with your goals and investing experience.

1. Buy new issues at Treasury auctions via TreasuryDirect

You can purchase Treasury bonds directly from the U.S. government through TreasuryDirect. The Treasury Department sets a minimum investment of $100, with additional purchases available in $100 increments and maturities typically of 20 or 30 years. When buying Treasury bonds this way, you avoid fees and commissions altogether. TreasuryDirect.gov is often the best choice for DIY investors who want to buy and hold individual Treasuries.

2. Buy in the secondary market through a broker

For investors who want flexibility, especially the option to sell before maturity, buying Treasury bonds through a brokerage account on the secondary market is often the best fit. Unlike TreasuryDirect, which sells new bonds at face value, the secondary market allows prices to shift based on investor demand, interest rate movements, and how long the bond has left until it matures.

When demand for Treasury bonds is high, you might pay a premium for a lower yield. When demand is low, you can often buy bonds at a discount and achieve a higher yield. Most major brokerages offer zero-commission online Treasury bond trading, though some still charge relatively low fees. Buying Treasury bonds through a brokerage on the secondary market generally gives you more flexibility and control over timing.

3. Buy broad exposure via Treasury bond ETFs or mutual funds

Exchange-traded funds (ETFs) and mutual funds offer a convenient way to gain diversified exposure to many Treasury bonds at once. This approach also gives you the benefit of professional management, seeing as the fund team selects and maintains the underlying holdings. You can trade Treasury ETFs — but not most types of mutual funds — like stocks throughout the day at market prices on major exchanges. 

Tax treatment of Treasury bonds

You’ll pay federal income tax, but generally not state and local tax on interest earned in Treasury bonds. Each year, the Treasury Department sends you and the Internal Revenue Service (IRS) a Form 1099-INT to use when you file your taxes.

If you sell a Treasury bond prior to maturity, the IRS treats any profit or loss like a capital gain or loss for tax purposes. Retirement investors often keep Treasury bonds in tax-advantaged accounts, like individual retirement accounts, or use them in conjunction with tax-deferred investments, like fixed annuities, to help maximize their tax advantages.

Treasury notes vs. bonds

While the U.S. government issues both Treasury notes (T-notes) and Treasury bonds, and both pay semiannual interest and return your full principal at maturity, there are important differences to note:

• Duration and interest-rate sensitivity: Treasury notes mature in 2 to 10 years, while Treasury bonds mature in 20 or 30 years. The longer the duration (time to maturity), the greater sensitivity to interest rate changes. Known as interest rate risk, this just means that the price of T-bonds typically fluctuate more dramatically as rates rise and fall.
• Typical yield relationship: Because you’re tying up your money for a longer period of time and exposing yourself to interest rate risk, Treasury bonds typically yield more than Treasury notes. However, yield curves can occasionally invert, a market phenomenon where shorter-term Treasury securities yield more than longer-term ones for a limited period.
• Typical use cases: Investors often choose Treasury notes to achieve shorter-term financial goals and moderately mitigate risk. Treasury bonds, on the other hand, are typically used to generate reliable income and provide stability over the long term.
  

Together, T-notes and T-bonds give investors flexibility to match their fixed-income investments with both their time horizon and tolerance for interest rate risk. There are also Treasury Bills (T-Bills) that are short term with maturities of 1 year or less and pay interest at maturity. 

Yield behavior and market drivers

Bond yields move constantly in response to investor demand, economic conditions, and expectations for Federal Reserve policy. Here are details on what drives the changes.

Primary auction clearing yields

The government issues new bonds and sells them at public Treasury auctions. The clearing yield sets the initial benchmark for each maturity.

Secondary market supply/demand

After issuance, Treasury bonds can trade on the secondary market and demand typically dictates yield. Strong demand, usually precipitated by large numbers of investors seeking a safe haven for cash, tends to mean lower yields. When investors shift to higher-risk assets or need to raise cash by selling treasuries and demand drops, yields generally rise.

Fed policy expectations

Decisions by the Federal Reserve about the federal funds rate have a powerful influence on Treasury yields. Rising interest rates generally lead to higher yields, while rate cuts tend to push yields lower. Even expectations of future policy changes can move the market well before a decision is officially announced.

Broader market data

Certain economic indicators, including inflation reports, GDP growth, and employment trends, shape investor expectations about interest rates. Because interest rates and bond yields are closely connected, strong or weak economic data can quickly influence Treasury market behavior.

These forces help create the ongoing shifts in Treasury yields that investors must monitor closely when evaluating risk, return, and overall market conditions.

Secure guaranteed growth and income with Gainbridge 

Treasury bonds are among the most low-risk investments available. Backed by the U.S. government, they guarantee a fixed interest rate, the return of your original investment, and twice-yearly interest payments. Plus, they’re easy to buy straight from the source at TreasuryDirect. 

If you want similar stability along with a guaranteed stream of retirement income, fixed annuities may be a better fit. Gainbridge’s fixed annuities protect your principal and provide guaranteed interest rates comparable to Treasuries and leading savings accounts or CDs. They also let you turn your balance into predictable retirement income, a feature government securities don’t offer.

Explore Gainbridge digital-first annuities today to see how you can combine stability with guaranteed growth and reliable retirement income.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer. CDs are deposit accounts offered by banks and credit unions, insured by the FDIC or NCUA. Annuities on the other hand, are an insurance product offered by an insurance company and are not FDIC or NCUA insured. 

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