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Investment Planning |
Bond Basics
Let's start out with a few bond definitions.
Treasury bill
Treasury bills, or T-bills, are short-term bonds having durations of one year or less. Common maturities are three months or six months. T-bills are assumed to be risk-free, since like all Treasury securities, they're guaranteed against default by the federal government; they also have short maturities and thus minimal interest-rate risk.
Treasury note
Treasury notes have maturities between one and 10 years. The 10-year bond is a 10-year Treasury note.
Treasury bond
Long-term bonds with maturities of 10 to 30 years are simply called Treasury bonds.
The generic term "bond" may be used for all fixed-income maturities; however, it is more precise to use "note" or "bill" if you're referring to a bond with a maturity of 10 years or less.
Since Treasury securities are guaranteed by the U.S. Government, they provide lower returns than other types of credit obligations. Remember that a bond's yield will always move in the opposite direction of its price. When interest rates are rising, bonds purchased when interest rates were low will fetch a lower price if you sold them today. However, you'll still get the stated interest if you hold the bond until maturity.
The Wall Street Journal recently changed its benchmark for bonds to the 10-year U.S. Treasury Note. The 10-year note, a type of bond, will mature 10 years from its issue date. Previously, the Journal's benchmark for bond returns was the 30-year bond. The federal government is actively trying to reduce its long-term debt, and consequently stock and bond investors are now scrutinizing the 10-year note to gauge the current conditions in the bond market. This change from a long-term to an intermediate-term benchmark for bonds signals the growing acceptance that bonds held for short- and intermediate-term maturities more closely resemble market realities.
Investors rely on the performance of the 10-year note to provide a reliable gauge of the performance of bonds, and also to monitor expectations about inflation and future interest rate policy of the Federal Reserve.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.