Understand How Investors Make Money Buying and Selling U.S. Government Securities
written by: Tim Plaehn•edited by: Doreen Martel•updated: 2/15/2011
How do investors make money buying and selling U.S. government securities? The possibilities range from simple buy-and-hold to short term trading in the futures pits.
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U.S. Government Securities
Marketable U.S. government securities are primarily U.S. Treasury, Notes and Bonds. Agency bonds make up a small portion of the government debt. These securities are actively traded on the secondary debt markets after being issued by the Treasury. The very large amounts of Treasury securities plus the wide range of different securities provides a range of answers to the "how do investors make money buying and selling U.S. government securities?" question.
Government securities can be purchased directly from the Treasury using an account on the TreasuryDirect.gov website. Investment brokers and dealers will also buy and sell Treasury securities for investors.
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Investing in Government Securities
The majority use of government securities for investors is as buy-and-hold securities. The Treasury issues debt securities with maturities ranging from 30 days to 30 years. An investor can find any maturity that fits her investment goals and horizon. Treasury securities pay a fixed rate of interest and the face amount when the bill, note or bond matures. An investor can buy a Treasury, sit back and collect interest from the U.S. government and have the bond pay off on the maturity date.
Treasury bills are the shortest maturity Treasury security at issue. Bills mature in 52 weeks or less. T-bills are sold at a discount to the face amount and the interest is earned when the bill matures. Treasury note are sold with maturities of 2 to 10 years and Treasury bonds have a 30-year maturity. Notes and bonds pay fixed, semi-annual interest payments and the face amount at maturity.
In the secondary market, Treasury securities can be purchased with almost any maturity date out to 30 years. The market price of Treasury notes or bonds may be at a premium or discount to the face amount, depending on the interest rate paid by the bond and current market rates. The term Treasury bond can also be used to indicate all interest paying Treasury securities, notes or bonds.
The answer for most on how do investors make money buying and selling u.s. government securities? is that they buy and do not sell, either with bonds directly or through mutual or exchange traded funds.
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Pay 2 of how do investors make money buying and selling U.S. government securities? Discussion includes institution trading of Treasury securities and trading government bonds on the futures markets.
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Pricing of Government Securities
As marketable securities, Treasury security prices will fluctuate based on current market interest rates. Most Treasuries pay fixed interest so the price will change as rate move up or down. Rising interest rates cause Treasury note and bond prices to decline. Falling interest rates result in higher debt security prices. The longer the maturity of the bond the greater the price change in response to changing rates.
Treasury bond owners in a rising rate environment have the choice of selling in the secondary market for a loss or holding the bond until maturity and receive the face amount. In a falling interest rate environment, investors can sell their Treasury securities for a profit, but then must find other investment options for the proceeds.
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Trading Government Securities
Short term trading of government securities is for the financially strong institution or investor. The trading system used by government security brokers and traders requires minimum trade amounts of $1 million for Treasury notes and bonds and $5 million for Treasury bills. Trading at these levels allows the generation of profits when rates change just a few hundredths of a percent.
Individual traders can make Treasury price / interest rate bets in the futures markets. Futures contract trade on a wide range of Treasury security maturities. Futures contracts are traded on the current price of the selected Treasury security. Futures trades can be made in either direction: higher prices for lower interest rates or vice-versa. To trade futures the trader must put up a margin deposit for each contract traded. In early 2011, margin deposits ranged from $400 for the 6-month T-bill futures to $5,000 for the long term T-bond futures. Futures traders can make profits (or losses) on very small changes in bond prices. For example, on the 10-year note futures, the minimum tick size is one-half of 1/32 of a point in the note price. The flip side is significant interest rate changes result in very large profits -- or losses. Futures trading is not for novices or those who cannot afford to lose the money they put into the trading.
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Primary Markets for U.S. Treasury Securities http://thismatter.com/money/bonds/types/government/treasury-markets.htm