U.S. Treasuries: a safe harbor in tumultuous financial times

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Every time the stock market plunges, you hear about a "flight to quality" -- about big institutional investors seeking refuge in U.S. Treasury securities. So you might think that investing in Treasury securities is only for the big guy.But the truth is that small investors may also invest in Treasury securities -- and find, in them, a safe harbor from the market's tumult.Treasury securities are backed by the full faith and credit of the U.S. government. So, for an investor, a Treasury security can be "a safe haven," said Michael T. Ryan, former head of the Rhode Island chapter of the Financial Planning Association, a trade group for financial planners and others."If your objective is safety, it's the safest investment you can make," said Ryan, a certified financial planner with Professional Planning Group in Westerly, R.I.You don't need to be Rich Uncle Pennybags to get involved, either. The minimum investment had been $1,000. But earlier this year, Uncle Sam lowered the threshold to $100.Thus, for just $100, you can buy a Treasury bill, note or bond directly from the federal government, with no fees or commissions to pay on the purchase. Here, in a nutshell, is how it works.In effect, you agree to loan Uncle Sam a certain amount of money. Uncle Sam agrees to pay you back your principal later on, plus interest.(That interest is subject to federal income tax, but escapes state income tax.)You get your money back when the Treasury security matures. When is that? It depends on which type of Treasury security you buy. Here are the general rules:-- Short-term Treasuries, known as Treasury bills, or T-bills, typically mature anywhere from 4 weeks to 52 weeks, said Stephen Meyerhardt, spokesman for the U.S. Treasury's Bureau of the Public Debt.-- Medium-term Treasuries, called Treasury notes, typically reach maturity anywhere from 2 years to 10 years.-- Long-term Treasuries are called Treasury bonds. They typically reach maturity in 20 or 30 years.Unlike U.S. Savings Bonds, Treasury securities are "marketable." That means they can change hands, through trading in a large and robust market, and their value can rise and fall with market conditions.So if you're a small, do-it-yourself investor, and buy Treasury securities directly from the government, it's best to buy and hold. That way, you'll get back all of what you originally invested, assuming you've held until maturity, Meyerhardt said.If you sell your Treasury security before it reaches maturity, you could get back more -- or less -- than you originally invested. Some other points to keep in mind: -- How interest is paid depends on the type of Treasury security you buy. For example, with a short-term Treasury bill, you buy at a small discount to the bill's face value. When the bill matures, you receive the bill's full face value. The amount of your interest equals the difference between the discounted purchase price and the T-bill's full face value at maturity.With a Treasury note or Treasury bond, however, you receive regular interest payments, every six months.-- Even if you invest through the government's TreasuryDirect program, and you hold your Treasury security until maturity, you won't get rich.For example, short-term Treasury bills lately have been yielding only about 1 percent or less; 10-year Treasury notes, only about 3.6 percent.But sometimes, especially in volatile times like these, the return of your principal can be even more important than the return on your principal.Broadly speaking, "You're not going to make any money, but you're not going to lose any money, either," Ryan said.-- If you're a small saver looking for yield, and can keep within federal deposit insurance limits (generally $100,000 per depositor, per account category, per institution), you may be better off with certificates of deposit at federally insured banks and credit unions.Five-year CDs, for example, have lately been yielding around 4 percent or 5 percent. (Be sure to check local banks and credit unions, which may have higher-than-average yields that don't show up on national CD yield surveys.)In general, the yield on a Treasury security is less than on a CD with a comparable term, Ryan said.-- Technically, the government's TreasuryDirect program has two options:The New TreasuryDirect option is all online, and there's no annual account maintenance fee, Meyerhardt said.The Legacy TreasuryDirect option includes account statements, a toll-free phone number, and a $100 annual account maintenance fee if your account balance exceeds $100,000.With either option, you can't invest at any time; you must wait until the Treasury makes available the Treasury security in which you're interested, through what's technically called a Treasury auction.For example, 4-week, 13-week and 26-week T-bills are typically auctioned once a week. Treasury notes typically are auctioned monthly, and Treasury bonds less often.If you don't want to use the TreasuryDirect program, you may buy Treasury securities at just about any time through brokers, financial planners and other intermediaries, who may charge various fees. Many mutual funds also invest in Treasury securities.To learn more about investing directly in Treasury securities, call the TreasuryDirect program toll-free at 1-800-722-2678, or use its Web site, www.treasurydirect.gov.E-mail Neil Downing at moneyline(at)projo.com(Distributed by Scripps Howard News Service, www.scrippsnews.com.)