Curated by: Rubric Advisors
Investing & Markets
Treasuries, I-Bonds, and TIPS: The Government Bond Toolkit
US government securities range from ultra-short T-bills to 30-year bonds and inflation-linked savings bonds. Knowing when to use each can materially improve your after-tax, after-inflation returns on safe money.
Treasuries, I-Bonds, and TIPS: The Government Bond Toolkit
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The Treasury Spectrum
- Treasury bills (T-bills): maturities of 4 to 52 weeks, sold at a discount and redeemed at face value
- Treasury notes: maturities of 2, 3, 5, 7, and 10 years, pay semiannual coupons
- Treasury bonds: 20 and 30-year maturities, higher yields, significant duration and price risk
- All Treasuries are exempt from state and local income taxes, a meaningful advantage for investors in high-tax states
- You can buy Treasuries at auction with no fees through TreasuryDirect.gov or in the secondary market through any brokerage
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Full Guide
The Treasury Spectrum
- Treasury bills (T-bills): maturities of 4 to 52 weeks, sold at a discount and redeemed at face value
- Treasury notes: maturities of 2, 3, 5, 7, and 10 years, pay semiannual coupons
- Treasury bonds: 20 and 30-year maturities, higher yields, significant duration and price risk
- All Treasuries are exempt from state and local income taxes, a meaningful advantage for investors in high-tax states
- You can buy Treasuries at auction with no fees through TreasuryDirect.gov or in the secondary market through any brokerage
T-Bills: The Emergency Fund Upgrade
- 4-week and 13-week T-bills consistently yield more than most savings accounts and are state-tax exempt
- Rolling T-bills (auto-reinvesting at maturity) provides a near-liquid, high-yield cash equivalent
- Treasury money market funds hold T-bills professionally and offer same-day liquidity, simpler than buying directly
- T-bill yields are quoted as annualized discount rates; a 5% discount rate on a 13-week bill is approximately 5.06% annualized return
- Ideal for Tier 2 emergency reserves or any money you'll need within 3-12 months
I-Bonds: The Inflation Hedge for Savers
- Series I savings bonds earn a composite rate: a fixed rate (set at purchase) plus an inflation adjustment that resets every 6 months based on CPI
- I-bonds cannot lose value in nominal terms, the floor is 0%, protecting against deflation
- Purchase limit is $10,000 per person per year on TreasuryDirect.gov, plus up to $5,000 via a tax refund
- Must be held at least 12 months; early redemption within 5 years forfeits the last 3 months of interest
- Federal taxable, state/local exempt, you can defer tax until redemption, useful for managing income brackets
TIPS: Inflation Protection in Larger Quantities
- TIPS principal adjusts with CPI, if inflation is 3%, your principal grows 3% and your coupon is paid on the larger amount
- No purchase limits, available in 5, 10, and 30-year maturities through TreasuryDirect or any brokerage
- The inflation adjustment is taxable each year as ordinary income even before you receive it, called 'phantom income'
- Best held in tax-advantaged accounts (IRA, 401k) to avoid annual phantom income tax
- TIPS mutual funds and ETFs (like VIPSX or SCHP) provide diversification without maturity concentration
When to Use Each
- T-bills: park short-term cash (1-12 months) at competitive, state-tax-exempt yields with near-zero risk
- I-bonds: ideal first $10,000-$20,000 of inflation protection, simple, no phantom income, no duration risk
- TIPS: larger inflation hedges, particularly in retirement accounts where phantom income isn't a concern
- Nominal Treasuries: when you want to lock in a real yield and have a specific maturity target for a cash need
- All four work best in combination, a well-structured fixed income allocation often includes multiple maturities
Key Takeaways
- T-bills beat most savings accounts and money market funds on an after-tax basis in high-tax states
- I-bonds are the simplest inflation hedge available to retail investors, start here before TIPS
- Hold TIPS in tax-advantaged accounts to avoid the annual phantom income tax problem
- TreasuryDirect.gov is free but clunky, many investors prefer buying Treasuries through Fidelity, Vanguard, or Schwab
- Short-term Treasuries reduce portfolio risk without sacrificing meaningful return relative to bank deposits
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