What are Treasuries? 

The top three things people know about Treasury bonds (aka “T-Bills”, “T-Bonds” or “The Long Bond”):

1. They’re the safest investment in the free world.

2. China owns a lot of them.

3. Grandparents love them.

All of these things are true– at least for the most part. However, we need to dig a bit deeper—especially if you’re considering an investment in Treasuries.

Where Do Treasury Bonds Come From?

The United States Treasury (aka the Treasury Department) is responsible for selling government bills to raise money for the U.S. government; these are Treasuries and often called government bonds.

Why Are Treasuries Considered Safe?

When you buy a Treasury you are effectively loaning money to the U.S. government in exchange for a certain rate of interest. In order to get paid back, you need to make the bet that U.S. government will stay in business—not that far of a stretch.

Contrast this to buying a corporate bond. When you buy a corporate bond you’re betting a corporation will pay you back. You need to make the bet the corporation will stay in business—a little riskier assumption.

The U.S. government, with their unlimited authority to levy taxes, has a far better ability to manage the money coming in and out than a corporation does.

Who Sets the Rate of Interest on These Treasuries?

Is it arbitrary? No.

The Federal Reserve requires that the public set the rate on Treasuries. This is called the “market” rate of interest, i.e. what the broader market is willing to buy the security for.

To do this, the Federal Reserve holds an auction where institutions and individuals have the right to bid on these Treasuries, thus setting a fair level of interest rates.

P.S. You can buy bills and notes directly from the government without paying a commission at Treasury Direct.