Ultimate Guide to How and Why Companies Buy US Treasuries
US Treasuries are short-term debt issued by the US government, backed by the full faith & credit of the United States, and offer attractive interest rate yields, high liquidity, and lower risk than comparable securities. Below we break down the intricacies of the US Treasuries system, explaining why companies both big and small benefit from investing in them. This guide will help clarify the process and answer the most common questions.
What are US treasuries and why do companies buy them?
US Treasuries are debt securities issued by the United States Department of the Treasury to fund government operations and meet financial obligations. They come in various forms, including Treasury bills, notes, and bonds, each with different maturities, ranging from a few days to up to 30 years. When companies buy US Treasuries, they are essentially lending money to the US government in exchange for a promised interest rate or yield, and the return of the principal amount when the security matures.Â
This investment is generally considered one of the safest in the financial market because the US government has a strong track record of meeting its debt obligations, making US Treasuries a low-risk, low-yield investment option.
There are several reasons companies choose to buy US Treasuries. First and foremost, they are seen as a secure store of value. They provide a safe haven for companies to park excess cash or funds temporarily. This is particularly appealing during times of economic uncertainty or market volatility when companies want to preserve capital without taking on excessive risks. Additionally, US Treasuries are highly liquid, meaning they can be bought and sold easily, which makes them a flexible investment option.Â
Although the largest purchaser of US Treasuries are institutions, funds, other US agencies, foreign governments, and individuals, corporations can also directly purchase & hold or sell US treasuries.
Companies often use them as a means to maintain liquidity while earning some interest on their idle funds. Finally, US Treasuries also serve as a benchmark for interest rates in the broader financial markets. So, when companies invest in Treasuries, they not only protect their capital but also gain valuable insights into prevailing interest rate trends that can influence their borrowing and investment decisions.
What are 5 types of US treasuries & how do they differ?
Treasury BillsÂ
Treasury bills are like short-term IOUs issued by the U.S. government. When you buy a T-Bill, you’re lending money to the government for a short period, as short as 4 weeks and up to one year. In return, you receive the initial amount you invested plus a little extra, which is the interest. T-Bills are considered one of the safest investments because they are backed by the U.S. government and have a fixed term, making them straightforward and low-risk.
Treasury Notes
Treasury notes are similar to T-Bills, but they have a longer duration, typically ranging from 2 to 10 years. When you purchase a Treasury note, you lend money to the government, and in return, you receive periodic interest payments every six months until the note matures. At maturity, you get back the full face value of the note. Treasury notes are considered a bit riskier than T-Bills but still relatively safe investments.
Treasury Bonds
Treasury bonds have the longest maturity among these securities, usually ranging from 10 to 30 years. When you buy a Treasury bond, you lend money to the government for an extended period. Like Treasury notes, you receive periodic interest payments every six months, and you get the face value back when the bond matures. Treasury bonds are often chosen by those looking for long-term, steady income from their investments.
Treasury Inflation- Protected Securities (TIPS)
TIPS are designed to protect your investment from inflation. When you buy them, your initial investment adjusts with inflation, so the value of your money stays relatively constant. You also receive interest payments every six months. TIPS are a smart choice when you want to safeguard your purchasing power against rising prices. However, TIPS penalize early withdrawals, so are useful in high-inflation, longer-term investment strategies
Savings Bonds
U.S. Savings Bonds are a way for individuals to lend money to the government. They come in Series EE and Series I. Series EE bonds are typically low-risk, with a fixed interest rate and a 20-year maturity period. Series I bonds, on the other hand, have their interest rates adjusted for inflation, offering protection against rising living costs. Savings bonds are usually intended for personal savings and can be purchased at banks or online.
Can my company invest directly in US treasuries?
Yes, as a corporation you can invest directly in US Treasuries. You can do this by purchasing them through the U.S. Department of the Treasury’s website, which offers an online platform called TreasuryDirect. This platform allows individual investors to buy and manage a variety of U.S. Treasury securities, including Treasury bills, notes, bonds, and Treasury Inflation-Protected Securities (TIPS).
Many companies, especially larger corporations, invest in Treasury bonds as part of their cash management and investment strategies. These bonds are considered a low-risk and highly liquid investment option, making them suitable for businesses looking to preserve capital while earning some interest on their available funds.
To get started, you’ll need to create an account on the TreasuryDirect website and provide some personal and financial information. The US Treasury may require additional verification steps before the account is fully live. Once your account is set up, you can buy, manage, and redeem your Treasury securities online. Investing directly in U.S. Treasuries is a straightforward and secure way to add these low-risk investments to your portfolio.
Here at Finvisor we can help your company through this process.
How much money do you need to buy a US treasury bond?
The minimum investment amount required to purchase a U.S. Treasury bond is $100. This relatively low threshold makes Treasury bonds accessible to a wide range of individual investors. You can buy Treasury bonds directly from the U.S. Department of the Treasury through their online platform, TreasuryDirect, or you can also purchase them through financial institutions like banks, brokers, or investment firms. Keep in mind that the exact process and minimum investment amount may vary slightly depending on where and how you choose to buy Treasury bonds, but $100 is the minimum amount when purchasing them through TreasuryDirect.
Why would a business invest in US Treasuries?
Businesses invest in US Treasuries for several reasons, and there are several benefits associated with these investments, here are a few of them:
- Safety: US Treasuries are considered one of the safest investments in the world. They are backed by the government, which has a strong track record of meeting its debt obligations. This safety is a primary reason businesses choose to invest in them.
- Liquidity: Treasury securities are highly liquid, meaning they can be bought and sold easily in the financial markets. This liquidity makes them an excellent choice for businesses that need quick access to their funds.
- Preservation of Capital: Investing in US Treasuries helps businesses preserve their capital. They can park excess cash or funds in Treasury securities to safeguard their money, especially during times of economic uncertainty or market volatility.
- Steady Income: Treasury bonds, notes, and bills provide a predictable and regular income stream. This can be appealing for businesses that want to earn interest on their cash reserves without taking on significant investment risk.
- Diversification: Treasury securities can be part of a diversified investment portfolio. By including them, businesses can spread risk and reduce exposure to more volatile asset classes, such as stocks or corporate bonds.
- Interest Rate Insights:Â US Treasuries also serve as benchmarks for interest rates in the broader financial markets. By investing in them, businesses gain valuable insights into prevailing interest rate trends, which can influence their borrowing and investment decisions.
- Government Incentives: In some cases, certain businesses may invest in specific types of US Treasury securities, like Savings Bonds, as a way to take advantage of government incentives designed to promote saving and investment.
- Financial Planning: For longer-term financial planning, such as pension fund management, businesses may invest in Treasury bonds with extended maturities to match their future financial obligations.
Overall, businesses invest in US Treasuries to protect their capital, generate income, and take advantage of the safety and liquidity offered by these government-backed securities. It’s a fundamental part of corporate financial management and risk mitigation strategies.
What are the disadvantages of investing in US treasuries?
While US Treasuries are generally considered a safe and reliable investment, there are some disadvantages and limitations to be aware of:
- Lower Returns on Investments: US Treasuries typically offer lower yields compared to many other investment options, such as corporate bonds, stocks, or real estate. This means that investors may earn less interest income from Treasuries, especially when interest rates are low.
- Complex Taxation for Inflation-Indexed Bonds: The taxation of inflation-protected Treasury securities (TIPS) can be more complex, as you may owe taxes on inflation adjustments even before you receive the actual cash.
- Interest Rate Risk: Treasury bond prices are inversely related to interest rates. If interest rates rise, the market value of existing bonds falls. This can result in a capital loss if you need to sell your Treasury bonds before they mature.
- Inflation Risk: Treasury securities, particularly T-Bills, may not keep pace with inflation. If the rate of inflation is higher than the yield on your Treasury investment, the purchasing power of your money may erode over time.
It’s essential to consider your financial goals and risk tolerance when deciding how to balance your investment portfolio. Diversification and a mix of asset classes are often the keys to building a well-rounded and balanced investment strategy.
What is the process of buying US treasuries for businesses?
The process of buying U.S. Treasuries for businesses is relatively straightforward and can be done through the following steps:
- Determine Investment Goals: First, the business should identify its investment goals. This includes considering factors like the desired level of safety, the need for liquidity, and the investment time horizon.
- Choose a Treasury Security: Select the specific type of U.S. Treasury security that aligns with the business’s goals. The options include Treasury bills, notes, bonds, and Treasury Inflation-Protected Securities (TIPS). The choice will depend on factors like the desired maturity period and whether protection against inflation is needed.
- Open a TreasuryDirect Account: To buy Treasury securities directly from the U.S. Department of the Treasury, the business needs to open a TreasuryDirect account. This account allows for the purchase, management, and redemption of Treasury securities. It can be done online through the TreasuryDirect website.
- Complete the Application: During the account setup, the business will need to provide information about its legal structure, taxpayer identification number (such as an Employer Identification Number, or EIN), and banking details for electronic fund transfers.
- Verify Information: The TreasuryDirect system may require verification of the business’s information. This verification process ensures the accuracy of the provided details.
- Place an Order: Once the account is established and verified, the business can place an order to buy the chosen Treasury securities. It can specify the amount to invest and the maturity date or period.
- Make Payment: To purchase the Treasury securities, the business will need to transfer the required funds from its linked bank account to TreasuryDirect. Payments are typically made through electronic funds transfer.
- Hold and Manage: The purchased Treasury securities are held in the business’s TreasuryDirect account. Businesses can view their holdings and manage them through the online platform. This includes reinvesting or redeeming the securities.
- Monitor and Collect Interest: Depending on the type of Treasury security, businesses will receive periodic interest payments, usually every six months. These payments are deposited directly into the TreasuryDirect account.
- Redeem or Sell: When the Treasury securities mature or if the business needs to access its funds, they can be redeemed or sold through the TreasuryDirect platform. The principal amount and any accrued interest are returned to the business’s linked bank account.
For businesses that prefer not to use TreasuryDirect, they can also buy U.S. Treasuries through financial institutions such as banks, brokers, or investment firms. The process may vary slightly from one institution to another, but they can assist with purchasing Treasury securities on behalf of the business.
It’s essential for businesses to carefully consider their investment objectives and consult with financial professionals if needed to ensure that their investment choices align with their financial goals and risk tolerance.
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*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*
- Last Modified
- January 6, 2024
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