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What are U.S. Treasuries?

The United States government issues treasuries to fund government expenditures. Treasuries are generally regarded as the safest bond investments because they are backed by the “full faith and credit" of the U.S. government. The risk that the U.S. government would ever default on its debt is extremely low. As a result of their lack of credit risk, treasuries almost always have lower yields than other bonds with similar maturities and coupon rates.

One of the most attractive features of treasuries is that investors do not have to pay state income taxes on U.S. government bond interest. This due to the concept of mutual reciprocity, or the laws of federal and state governments which prohibit them from taxing interest on each others' bonds. Mutual reciprocity applies only to interest payments. If a treasury is sold before it matures then capital gains are subject to taxation.

Treasuries are issued by the United States Department of Treasury during treasury auctions. They are classified according to maturity as detailed in the following chart:

U.S. Treasuries
U.S. Treasury Bills (T-bills)	Maturities from 90 days to 1 year
U.S. Treasury Notes (T-notes)	Maturities from 1 year to 10 years
U.S. Treasury Bonds (Govies)	Maturities from 10 to 30 years

The primary determinant of a treasury’s performance and functionality is its remaining length-to-maturity. For example, although a treasury note issued nine and a half years ago with six months remaining until maturity is still referred to as a treasury note, it will be valued and will function with close similarity to a six-month treasury bill.

Questions:

1. Why are treasuries considered to be the safest fixed income investments?

2. Explain the concept of mutual reciprocity.

Answers:

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