Stock Market

Don't feel too bad about staying away from the tantalizing array of corporate debt out there. The U.S. Government issues plenty of options that are much healthier for your portfolio. The best part? Uncle Sam's obligations are considered risk-free. That is, you are always going to get your interest and principal because the debt is backed by the full faith and credit of the United States Government. In practical terms, if the Treasury runs short, the Feds can either turn on the printing presses and print more money or simply raise taxes to increase revenue.

U.S. Government debt is issued by:

The Treasury Department
Government and Quasi-Government Agencies

U.S. Treasury debt takes one of three forms:

Treasury bills (out to one-year maturity)
Treasury notes (2- to 10-year maturities)
Treasury bonds (maturities beyond 10 years)

There are also two other forms of Treasury debt:

Treasury STRIPs are Treasury notes and bonds "stripped" down to their individual coupons and maturity. These are sold at a discount like Treasury bills, and are very useful if you know you will need a sum of money by a certain date (college tuition, for example).

Treasury debt also appears as inflation-indexed notes and bonds. These include an inflation adjustment, which you get when the bond matures. So if you buy a $10,000 inflation-indexed bond and inflation has risen by 10 percent by the time the bond matures, you'll get your $10,000 principal back plus a $1000 inflation adjustment.

How to Buy Treasuries

Treasury securities are easy to purchase at regular Treasury auctions. You can participate online via Treasury Direct (www.publicdebt.treas.gov/sec/sectrdir.htm). There are weekly T-bill auctions, monthly one-year T-bill auctions, and quarterly Treasury note and bond auctions. Check your local newspaper or The Wall Street Journal for advance notices, which usually appear five to seven days before an auction. You can also deal directly with your nearest Federal Reserve Bank or ask your banker or broker to make purchases for you for a small service fee of around $25. The minimum purchase is $1,000 and all bids must be made in $1,000 lots.

Besides buying Treasuries at auction, you can also buy outstanding Treasuries on the market. They will be trading either at a discount or a premium (although you will receive your principal back in full at maturity, the par value of a bond will fluctuate in the interim due to changes in interest rates; as rates decrease, bond prices increase and vice versa).

What does this mean to you? Well, a bond or note is selling at a premium because it pays a higher interest rate than current new notes or bonds. So if you buy an outstanding Treasury at a premium, you will get higher interest income than you would from the new Treasuries being auctioned. On the other hand, you don't get all of your principal back when you buy a Treasury that is trading at a premium. Remember, the principal is the amount that the borrower originally borrowed. If you buy a $10,000 Treasury note at a premium, it'll cost more than $10,000, but $10,000 is all you get paid back at maturity.

A discount bond works in just the opposite manner. Let's say you purchase a Treasury bond trading at 96, or $9,600. You'll receive $10,000 at maturity, for a gain of $400. However, you'll get interest income from this note for around $400-$600 less than the current rate. Is it worth it to receive less income in return for greater principal return? That depends on what's more important to yousome people want income, some want a greater return in the long run. If the answer to either question is no, just buy at the auctions.