What is the 30 Year Treasury
The 30-year treasury is a US debt security that pays interest every 6 months until they mature, at which point they pay the face amount of the bond after 30 years also known as the maturity period. Many investors believe that the 30 Year Treasury used to be the leading indicator for interest rates in the US market but most say the bellwether for interest rates to be the 10 Year Treasury Bond.
Understanding the 30 Year Treasury
One of the many ways the US government keeps itself afloat is by issuing Treasury Bonds. How they work is essentially the process of the US government borrowing money from investors by issuing Treasury Bonds with a given maturity period attached to them. These debt securities include Treasury Notes/Bonds, Treasury Bills, and Treasury Inflation-Protected Securities which can all be purchased from the US government. Bills can be easily converted into cash and mature in less than a year, whereas notes are mature in 2 to 10 years.
Similar to notes and bills, TIPS, which are also easily converted into cash, have a principal (initial amount invested or paid for said treasury) that is changed based on the consumer price index. For example, the principal increases with inflation and decreases with deflation. Any of these which fall under long-term treasury securities can be acquired as a US Treasury Bond.
Keep in mind Treasury bonds are debt obligations with maturity dates that last anywhere from 20 to 30 years. As mentioned previously these Bonds pay interest semi-annually until they mature, at which point they pay the face amount of the given bond. 30-year treasury bonds often pay a higher interest than short-term securities to reimburse the risks that come with longer maturity treasury bonds. Although, regardless of risk these bonds are very safe and secure investments as they come from the US government.
The buying price of a 30-year treasury bond is decided at an auction where it is set at 3 different levels, Par or average, Premium/higher, and at a discount. Note that when the yield to maturity (YTM) on a said bond is greater than the interest rate the price of the bond will be sold at a discounted price. Secondly, when the YTM is equal to the interest rate the price will be at par. Finally, when the YTM is lower than the interest rate then the bond will be sold at a higher price or a premium.
Investors can purchase up to $5 million in bonds through non-competitive bidding or 35% of the initial offering amount through competitive bidding in a single auction. Note that bonds are sold in increments of $100 and at a total minimum $100.
30 Year Treasury vs. Savings Bonds
US Savings bonds are very similar to treasury bonds but not quite the same. Essentially these bonds exist as non-marketable debt securities that earn interest over 30 years. Although, the interest accumulates over time rather than being paid out every 6 months. Instead, the interest is paid out whenever the investor redeems the bond. Note that the bond can be cashed whenever the investor chooses to do so as long as a year has passed, but if the investor chooses to redeem the bond before 5 years of ownership the last 3 months of interest will not be included in what they receive.
The US is a safe borrower, therefore, many people and investors alike view the 30-year treasury bonds interest rates as a sign of the overall health of the bond market. For example, interest rates go up with low demand for 30 Year Treasury Bonds and down when demand is high.