source: www.coloradoan.com

James L. Watt, CPA/PFS, • November 23, 2008

With stock prices volatile and in retreat, many investors are turning to U.S. government securities for safety, predictability and liquidity.

Treasuries have tax advantages, are in demand by investors worldwide and are the most liquid of all capital investments. Trading in U.S. Treasury securities is a 24/7 activity.

Individuals but not companies can buy Treasury securities directly from the government at auction using Treasury Direct or in the secondary market through a broker. If buying at Treasury Direct, the buyer receives the average price at which big investors purchased the security.

U.S. Treasury securities are obligations of and are guaranteed for both principal and interest by the U.S. government.

Bills, notes and bonds are the principal government securities. Treasury bills, or T-bills, are issued in 4-, 13-, 26-, and 52-week maturities and are bought/sold at a discount from face value.

The difference between the face value and the purchase price is the discount. T-bill discounts are expressed at an annualized rate or yield. The yield is the bond equivalent yield an investor would use to compare treasuries with other securities of comparable maturities.

As this column is written, the T-bill maturing Oct. 22 is quoted at 1.16 bid and 1.15 ask. The seller is willing to sell at a 1.15 percent annual yield and the buyer is willing to buy at a 1.16 percent annual yield. The yield on the ask price is 1.176 percent. You might think the small difference is not meaningful. It isn't to you and me, but it is if the investment is $100 million or more.

Treasury notes are issued with maturities of more than one year but less than 10 years. Notes are commonly issued with maturities of 2, 3, 5 and 10 years. Treasury bonds have maturities of 10 years to 30 years. Note and bond interest is paid at six-month intervals. The 30-year bond, or long bond, is a favorite of retirement plans and insurance companies.

Long bonds (also bills and notes) can be purchased at issue or in the secondary market, and maturities can be matched with expected obligations of the purchaser.

Parents might purchase bonds with maturities coinciding with the enrollment of their children in college. A retiree might ladder a series of treasury issues with one maturing each year during an expected retirement life.

Treasury notes and bonds are actively traded. Bid and ask prices are quoted per $100 of the security's face value. The number following the decimal is 32nd of a dollar. The bid is the price the buyer is willing to buy at, and the ask is the price the seller is willing to sell at. As this column is written, the 3 1/8 percent T-note maturing in November 2009 is bid at 101.31, or $101.96875. The asked price is 102, or $102. The annual yield on the ask price is 1.20 percent.

Other common Treasury securities include inflation-indexed securities, or TIPS; stripes; and U.S. savings bonds.