Trader Knowledge Combined with Sound Trading System for Trading New 30-Year Treasury Bonds Successfully
. . . A 30-year Treasury debt has a maturity of 30 years. The 30-year Treasury Bond used to be the leader U.S. bond but now most consider the 10-year to be the standard.
The 30-year Treasury Bond usually pays a higher interest rate than shorter Treasury Bonds to compensate for the additional risks inherent in the longer maturity. However, when compared to other bonds, Treasury Bonds are relatively safe because they are backed by the U.S. government.
Bids for the auction may be placed through a broker or financial institution, or directly from Treasury through the Treasury Direct and Legacy Treasury Direct systems. In Treasury Direct or Legacy Treasury Direct, account holders can place non-competitive bids for 30-year bonds today.
The 30-year bond will diversify Treasury’s funding options and expand its investor base. The reintroduction of the bond will also stabilize the average maturity of the public debt. Before the reintroduction of the 30-year bond, the 20-year TIPS was the longest dated marketable security issued by Treasury.
The 30-year t-bond has long been a favorite of fixed income market participants seeking to match assets to future liabilities and it serves as an important benchmark by which other long-dated securities are measured. Trading Tip of the Day
A Treasury bond pays interest every six months until it matures. When a Treasury bond matures, you are paid its face value.
Basics of U.S. Treasury Bonds
The U.S. Treasury resumed issuance of Treasury bonds with a 30-year bond auctioned in February 2006. In 2007, we'll auction 30-year bonds in February, May, August, and November.
The price and yield for a bond are determined at auction. For a full discussion of the price of a bond, see Treasury Bonds: Rates and Terms.
You can buy Treasury bonds from us in TreasuryDirect and Legacy Treasury Direct. NOTE: At this time, only individuals can hold accounts in TreasuryDirect.
Two types of bids are accepted:
With a noncompetitive bid, you agree to accept the interest rate determined at auction. With this bid, you are guaranteed to receive the bond you want, and in the full amount you want.
With a competitive bid, you specify the yield you are willing to accept. Your bid may be:
1) accepted in the full amount you want if your bid is equal to or less than the yield determined at auction,
2) accepted in less than the full amount you want if your bid is equal to the high yield, or
3) rejected if the yield you specify is higher than the yield set at auction.
To place a noncompetitive bid, you may use Treasury Direct, Legacy Treasury Direct, or a bank, broker, or dealer.
To place a competitive bid, you must use a bank, broker, or dealer.
Bonds exist in either of two formats: as paper certificates (these are older bonds) or as electronic entries in accounts. Today we issue Treasury bonds in electronic form, not paper. Paper bonds can be converted to electronic form.
The yield on a bond is determined at auction - Bonds are sold in increments of $1,000. The minimum purchase is $1,000. You can hold a Treasury bond until it matures or sell it before it matures. In a single auction, an investor can buy up to $5 million in bonds by non-competitive bidding or up to 35% of the initial offering amount by competitive bidding.
Tax Considerations for Buying U.S. Treasury Bonds
Interest income is exempt from state and local income taxes.
Interest income is subject to federal income tax.
Treasury Yield Curve Rates. These rates are commonly referred to as "Constant Maturity Treasury" rates, or CMTs. Yields are interpolated by the Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of quotations obtained by the Federal Reserve Bank of New York. The yield values are read from the yield curve at fixed maturities, currently 1, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. This method provides a yield for a 10 year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.
Negative Yields and Nominal Constant Maturity Treasury Series Rates (CMTs). Current financial market conditions, in conjunction with extraordinary low levels of interest rates, have resulted in negative yields for some Treasury securities trading in the secondary market. Negative yields for Treasury securities most often reflect highly technical factors in Treasury markets related to the cash and repurchase agreement markets, and are at times unrelated to the time value of money.
As such, Treasury will restrict the use of negative input yields for securities used in deriving interest rates for the Treasury nominal Constant Maturity Treasury series (CMTs). Any CMT input points with negative yields will be reset to zero percent prior to use as inputs in the CMT derivation. This decision is consistent with Treasury not accepting negative yields in Treasury nominal security auctions.
In addition, given that CMTs are used in many statutorily and regulatory determined loan and credit programs as well as for setting interest rates on non-marketable government securities, establishing a floor of zero more accurately reflects borrowing costs related to various funding programs.
Treasury Yield Curve Methodology. The Treasury yield curve is estimated daily using a cubic spline model. Inputs to the model are primarily bid-side yields for on-the-run Treasury securities.
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