'Treasury Bonds' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Treasury Bonds are also called T-Bonds. These financial instruments prove to be government debt issued by the United States federal government at a fixed rate of interest. Such debt securities come with maturity dates of longer than 10 years. The T-bonds offer interest payments twice per year. Because they are federal debt instruments, their earned income may only be taxed by the federal level authorities of the Internal Revenue Service. Though nothing is really risk free in the investing world, investors generally consider these bonds to be virtually without risk, since they are issued by the United States federal government. Investors perceive them to have a minimal amount of default risk.
Such Treasury Bonds turn out to be among the four kinds of Department of Treasury issued debt. They employ all of these to finance the runaway spending activities of the Federal Government. In these four debt types are the T-bills, Treasury notes, T-bonds, and TIPS Treasury Inflation Protected Securities. Each of these different debt securities is different according to both their coupon payments and their varying maturities.
Despite this, every one of them are the benchmarks for their particular fixed income categories. This is because they are American government backed, almost free of risk, and guaranteed by the revenues and tax base of the United States Treasury. In theory the Treasury can always levy higher taxes to make sure the interest and principles are repaid on these financial instruments. As they are all the lowest returns in their investment category, they are also deemed to be benchmarks for the various fixed income types of investments.
Such Treasury Bonds come standard issued with maturities which vary from 10 years to as long as 30 years. Their denominations start at $1,000 minimums. Each coupon interest payment pays out on a semi-annual basis. The bonds themselves sell via an auction system. The most of them that investors can purchase is $5 million when the bid proves to be non-competitive or as much as a full 35 percent of the entire issues when the bids turn out to be competitive.
It is important to understand what a competitive bid actually is. These types of bids declare that the bidder will accept a certain minimum interest rate bid. These become accepted according to the comparison versus the bond’s set rate. With noncompetitive bids, bidders are guaranteed to receive the bonds so long as they will take them at the pre-set interest rate. Once the bonds have been auctioned off, the buyers may sell them off via the secondary market.
Investors call the active market for Treasury bonds re-sales the secondary market. Thanks to this enormous market, T-bonds and T-bills are extremely liquid. It means they can be easily resold on a constant continuous basis. It is this secondary market that causes the T-bonds’ prices to gyrate considerably in the markets. This is why both yield rates and current auction rates for the T-bonds determine their prices via the secondary market.
As with all other kinds of standard bonds, these Treasury bonds will experience declining prices as the rates at auction increase. Conversely, the bonds will experience rising prices when the auction rates decrease. The reason for this inverse relationship is that the future cash flows of such bonds becomes discounted according to the higher rate.
T-bonds are also important because they are part of the yield curve for the fixed income markets. As one of the four principal investments which the American federal government offers, they make up this yield curve. The curve is critical because it pictorially displays the range of maturity yields. It is typically sloping upward since lower maturities provide lower rates than do the farther out maturity varieties. There are cases though when the farther out maturities experience peak demand. This causes the yield curve to become inverted. In such a scenario, the farther out maturities will have lower rates than the closer dated maturities.