Treasury bond funds invest in US Treasury bonds and are considered safer than corporate or municipal bond funds. However, they are vulnerable to future price changes, prepayment risk, interest rate changes, and default risk. Interest rate decisions by the Federal Reserve impact the net asset value of government bond funds. Some government bond funds provide protection against inflation in the US economy.
Treasury bond funds, or Treasury funds, are mutual funds that invest primarily in United States (U.S.) Treasury bonds, which are tradable income-producing debt securities issued by the United States government. . Since Treasuries are backed by the creditworthiness of the US government, Treasury funds are considered by most investors to be a safer bond fund option than corporate or municipal bond funds. However, Treasury bonds have maturity dates of 10 years or more, making Treasury funds vulnerable to future price changes, prepayment risk, interest rate changes, and default risk. The duration of a Treasury fund can be calculated by finding the weighted average of the time remaining to maturity for each bond in the fund. Treasury funds produce a rate of return determined by both the change in the net asset value of the bonds and the value of interest distributions paid semiannually.
Interest rate decisions made by the Federal Reserve directly impact the net asset value of government bond funds, especially those that contain mortgage-backed securities issued by government lending agencies, Treasury bills, notes, and other securities with expiration dates less than five years. Long-term Treasury fund prices tend to be market driven. In 2010, Treasury funds posted returns of up to 10 percent, while short-term funds only returned up to 4 percent. Intermediate funds, with maturities of five to 10 years, returned 2 to 5 percent in 2010.
The US government auctions Treasury bonds through non-competitive and competitive bidding. For non-competitive bids, where the bidder agrees to a fixed fee, the maximum purchase amount is restricted to $5 million United States Dollars (USD). In competitive auctions, where bidders submit rates they are willing to pay, the maximum purchase allowed is up to 35 percent of the entire bid. Treasury funds contain not only Treasury bonds, but also some other longer-duration Treasury securities. Many Treasury funds strive to outperform the long-term Treasury bond index, including Vanguard Long-Term US Treasury (VUSTX), T. Rowe Price US Treasury Long Term (PRULX), and Dreyfus US Treasury Long Term (DRGBX).
Some government bond funds provide protection against inflation in the US economy. In these funds, the rates of return or principal amounts are linked to rises and falls in the rate of inflation. Different funds offer different inflation protection strategies, making rates of return variable from fund to fund. Investors should note that taxes apply not only to the income of the fund, but also to any adjustments made to the principal.
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