By: Michael E. Martinez

A Treasury security is a negotiable debt obligation of the U.S. government backed by its full faith and credit and issued with various maturities. These are I.O.U's of the U.S. Treasury Department. To finance public debt, the U.S. Treasury sells bills, notes, bonds and securities through public auctions. February 2006, the Treasury will resume the auction of Treasury bonds. These auctions occur regularly and have a set schedule. The auctions for bonds are announced in advance in most major newspapers and press releases.

The Treasury receives bids for marketable securities from institutions and individuals. A bid can change until either the non competitive or competitive close for that auction. A bid must conform to the terms and conditions used stated in the auction announcement and the rules. The Treasury reviews the bids received on the auction day to ensure that they are conformed to the rules. Non competitive bids will be accepted until the issue date.

Once the auction closes, no bids or changes are allowed. If you bid in the auction and it is accepted, you are responsible for full payment. When bidding in a treasury auction, you bid non competitively and competitively for notes, bills or tips. Non competitive bids are submitted by small investors through a Federal Reserve Bank, the Bureau of Federal Debt or certain commercial banks. These bids will be executed at the average of the prices paid in all the competitive bids accepted by the treasury.

The minimum non-competitive bid for a treasury bill is $10,000. Most individual investors can bid non competitively to ensure that the security amount requested is accepted. You agree to accept the discount rate or yield given at the auction. The Treasury guarantees that you will receive the security for which you bid in the full amount requested up to the maximum limit. Maximum bid limits are $5 million for bills, notes and tips. On auction day the non competitive close time is usually earlier than the competitive close time.

Competitive bids are entered by large government securities, dealers and brokers, who buy millions of dollars worth of bills. They offer the best price they can for the securities and the highest bids are accepted by the Treasury in what is called the Dutch Auction. Institutional investors who are familiar with securities bid competitively. Awards to a single customer may not exceed 35 percent of the total offering. Bidders specify the discount rate or yield they want to receive. You may or may not be awarded the security for which you bid. It all depends on how your bid compares to the discount rate or yield determined at auction. You can buy treasury bonds directly from the Federal Reserve Bank or from the Bureau of Public Debt; you can also buy through a brokerage firm which you will pay a commission.

Besides purchasing these from the government, you can buy or sell treasury bonds on the bond market. The market for treasury bonds is very large so there's always a buyer or seller, but not necessarily at the price you want. Treasury bonds are not callable, and you can have them for up to 30 years or longer for example. If you already own bonds and you're locked into a good rate before the current rates dropped, you have better returns than anything you can get today.

When inflation is low, it's not a bad investment, especially since you don't have to pay federal or state taxes on the interest income. This makes your yield equal to that of a slightly higher yield investment. You will have to pay capital gains tax when you sell the bond. Treasury bonds and notes are a safe investment with specific perimeters. Treasury bills are short term securities with maturities of one year or less. Individual investors who do not submit a competitive bid are sold bills at the average price of the winning competitive bids.

Treasury bills are the primary instrument used by the Federal Reserve in its regulation of money supply. Treasury bonds are long term debt instruments with maturities of ten years or longer used in minimum denominations of $1,000. Treasury notes are intermediate securities with maturities of one to ten years; denominations range from $1,000 to $1 million or more. The notes are sold by cash, subscription in exchange for outstanding or maturing government issues or at auction.