Lending money to the largest economy in the world as part of your portfolio’s investment strategy is already a reality. In this article, you will learn more about the American Treasury, considered by many to be the safest bond in the world.
But after all, what is Treasuries?
The American Treasury, or Treasuries, essentially represents a form of loan to the US government. The government, like any entity, needs resources to sustain its operations and provide services to society, such as education, health and infrastructure, in addition to also needing to pay off its debts. In this way, the government uses several sources of revenue, such as income tax, tax on products and services, revenues from public companies, rents, sales of goods and provision of services.
However, all these sources may not be enough to cover your expenses. Therefore, he seeks a solution in the financial market, taking out loans. And the truth is that in addition to banks, any person or company can lend money to the government. In exchange, the government undertakes to pay interest and return the amount on a pre-established date in the future.
And why are Treasuries considered by many to be the safest securities in the world?
Security lies in the guarantee of the North American government itself. The risk of not getting the money back is very small, given that the world’s largest economy is highly unlikely to default on its creditors. Therefore, Treasuries are widely recognized as the safest assets on the market.
In periods of global economic instability, a significant part of investors direct their money to Treasuries, seeking security from the American government.
And the most interesting thing is that their rates serve as a reference for other emissions. In the international market, companies that want to issue fixed income securities need to pay an interest rate above the Treasuries rate, placing an additional increase, called a spread, according to the credit risk. In Brazil, this same dynamic occurs, where private fixed income bonds are related to Treasury bonds and have an increase in the interest rate, according to the risk and term.
The Different Types of Treasuries
Unlike Brazil, in the American market, the majority of fixed income securities are prefixed. This means that when you buy a bond, you already know exactly how much interest you will receive if you hold it until maturity. There are five types of Treasuries. T-Bills, T-Notes and T-Bonds are prefixed securities:
Treasury Bills (T-Bills)
T-Bills are short-term bonds, with maturities ranging from 4 to 52 weeks. They are always purchased at a discount, that is, the amount borrowed plus interest will only be paid on the due date.
Treasury Notes (T-Notes)
T-Notes are medium-term bonds, with maturities of 2, 3, 5, 7 or 10 years. Unlike T-Bills, T-Notes pay semi-annual coupons, that is, every 6 months you receive proportional interest for the period. On the maturity date, the last 6 months of interest are paid, plus the face value of the bond, which is always one thousand dollars.
Treasury Bonds (T-Bonds)
T-Bonds, finally, are long-term bonds, with maturities of 20 or 30 years. Just like T-Notes, T-Bonds pay a fixed amount every six months and at maturity, you receive the last installment of interest plus the face value ($1,000).
TIPS, on the other hand, are securities linked to inflation:
Treasury Inflation Protected Securities (TIPS)
TIPS are securities that seek to protect the investor against inflation. Available maturities are 5, 10 or 30 years. Unlike other Treasuries, the principal value of TIPS can rise or fall over time, depending on the accumulated inflation of the period and they also pay a semi-annual coupon.
And FRNs are post-fixed titles:
Floating Rate Notes (FRNs)
FRNs are bonds with a 2-year term, and pay interest quarterly. Rates adjust (or “float”) as American interest rates change.
It is worth mentioning that all of these bonds can be traded on the secondary market, meaning the investor can exit before the maturity date. And the American market is the most liquid market in the world, representing 40% of the entire global fixed income market.
The Size of the Treasury Market
Treasuries are the most common form of fixed income investment in the United States. According to data from SIFMA (Securities Industry and Financial Markets Association) from 2022, of the total US$55 trillion in fixed income stock, 43% were Treasuries.
How to Invest in Treasuries
As for investing in Treasuries in the USA, just as we have Treasury Direct in Brazil, there is Treasury Direct. However, for those who are not citizens or tax residents in the USA, the alternative is to open an account with an American institution.
Through TankBank it is possible to access Tresuries directly, or indirectly through ETFs and Investment Funds whose main strategy is investing in American government bonds.
Why invest in Treasuries?
- Stable Income: Most Treasuries pay fixed interest regularly, providing a predictable income stream.
- Capital Preservation: Treasuries are generally considered safer compared to other fixed income securities and also compared to stocks and can help preserve invested capital.
- Diversification: Treasuries can be an important addition to diversify an investment portfolio, balancing the risks associated with other asset classes.
Risks involved:
- Credit risk: Although very small, we cannot fail to mention the risk of the American government not honoring its payments. Assessing the issuer’s credit rating and financial health is always important.
- Interest rate risk: Bond prices are affected by changes in interest rates. In the case of fixed-rate bonds, when interest rates rise, bond prices generally fall (a rise or fall in the interest rate will not change the coupon payment, only affecting the mark-to-market of the face value of that Bond)
Taxation*:
It is important to highlight that this content is valid as of the date of publication of this article. Taxation rules can change, and for this reason, it is very important that you are aware and confirm all the rules in force when calculating and collecting your tax.
Capital gains are subject to Income Tax and are calculated as the difference between the purchase value and the sale value of the Bond.
The rate varies according to the value of the capital gain. If the gain is up to R$5 million, the rate is 15%. For gains between R$5 million and R$10 million, the rate is 17.5%. For gains between R$10 million and R$30 million, the rate is 20%. And for gains above R$30 million, the rate is 22.5%.
If your sales of assets abroad do not exceed the value of R$35,000 within the same month, you are exempt from paying this tax.
Income from interest on Bonds, that is, coupons, are also subject to Income Tax taxation, following the same progressive rate table according to earnings. However, it is important to highlight that in this case there is no exemption range, that is, all income will be taxed.
Payment is made via DARF, until the last business day of the month following the month of sales.
Final considerations:
Investing in the US Treasury can be an interesting opportunity to diversify your fixed income investment portfolio. But remember that when evaluating a security, it is very important to understand your investor profile and carry out a careful analysis before making any investment decision.
Newsletter
Keep in touch with our news & offers
