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Treasury receipts are a type of bond bought at a discount, and the full value is paid at the date of maturity. These types of bonds aren’t issued by the U.S. Treasury Department, but they are backed by U.S. government securities.
Whether you’re looking to invest in bonds or diversify your portfolio, Treasury receipts might be an option. Learn what they are and how they work to see if they are worth the investment for you.
What are Treasury receipts?
Treasury receipts are a type of zero-coupon bond sold at a discount. Buyers get paid the full value of the bond once it matures instead of receiving interest periodically. Treasury receipts are created and sold by brokerage firms, not by the U.S. government. But these bonds are backed by U.S. Treasury bonds, which are considered a low risk investment.
You can only purchase Treasury receipts through banks, dealers or brokers that manage government securities.
How do Treasury receipts work?
Brokerages create and sell Treasury receipts to investors. A treasury receipt starts as a U.S. Treasury bond. Brokerages buy bundles of U.S. Treasury bonds, then strip the bonds’ components into different securities: principal payments and interest payments.
A principal payment becomes a Treasury receipt that is sold at a discount to investors who then get the full value once the bond matures. The interest payments are sold to other investors looking for income. A single 10-year bond with one principal payment (a soon-to-be Treasury receipt) and 20 interest payments becomes 21 securities after being stripped. Each payment becomes a separate security. At that point, the Treasury receipt is no longer a Treasury bond but is still backed by a Treasury bond.
Treasury receipts are different from regular bonds. Many bonds pay interest regularly — quarterly, biannually or annually. Treasury receipts only make one payout at the bond’s maturity date, hence the classification as a zero-coupon bond. Your payout could be years after your original purchase, and you won’t see regular, reliable growth like you would with other investments.
Because you’re buying the bond at a discount and not expecting interest, you’ll need to wait for the bond to fully mature before getting the highest return on your investment. You can sell a Treasury receipt before maturity though. You just won’t get the full value.
How can you buy Treasury receipts?
You can buy Treasury receipts from financial institutions that sell them, such as a brokerage. These zero-coupon bonds are sometimes called STRIPS: Separate Trading of Registered Interest and Principal Securities. You can buy “stripped” Treasury notes, Treasury bonds or Treasury-Inflation Protected Securities (TIPS), ranging in maturity from two to 30 years.
These types of Treasury offerings sell at auctions. Once your broker buys them and separates the principal and interest payments, you can make your purchase. Even though the government doesn’t issue these receipts, they are collateralized by Treasury bonds. So they work similarly to government-issued bonds but with an extra layer of management from a brokerage.
Should you buy Treasury receipts?
Treasury bonds, including Treasury receipts issued by brokerage firms, are a type of low-risk, long-term investment. Some people might prefer these low-risk or virtually risk-free investments. Other investors prefer more frequent interest payments, higher payouts or alternative investments. If that’s you, consider other options outside of Treasury receipts, such as bond funds or other types of bonds.
Bottom line
If you don’t mind waiting to see investment growth until your bond fully matures — 10 or even 30 years later — buying Treasury receipts might be worth the investment. But if you want to jump-start your investments right now, you may want to look into other types of securities for your portfolio.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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