Glossary · Instruments
Treasury Bond (T-bond)
A Treasury bond is a long-term US government debt security, issued with 20- or 30-year maturities, paying a fixed coupon every six months and repaying par at maturity.
US Treasury securities are grouped by maturity: bills (one year or less, issued at a discount), notes (two to ten years) and bonds (20 and 30 years), all backed by the full faith and credit of the US government. Treasury bonds and notes pay a fixed coupon semiannually. Related instruments include Treasury Inflation-Protected Securities (TIPS), whose principal adjusts with CPI, floating-rate notes, and STRIPS, which separate coupons and principal into zero-coupon securities.
Treasuries are the benchmark risk-free curve for USD markets. Funds hold them for duration exposure, as a hedge against risk assets, as collateral for derivatives and repo, and as the deliverable underlying for Treasury futures. Relative-value and basis-trading strategies combine cash Treasuries, futures and repo financing in the same position.
How funds account for Treasury bonds. Positions are carried at fair value using evaluated or dealer prices, typically Level 1 for on-the-run issues and Level 2 for off-the-run issues. Interest is accrued daily on an actual/actual day-count basis, and premium or discount may be amortized under the effective interest method. Trades settle T+1 in the US market. TIPS require an additional daily inflation-accretion entry based on the index ratio, which is a frequent source of accounting errors.
Pitfalls. Common issues include using the wrong day-count convention (Treasuries use actual/actual, not 30/360), missing the semiannual coupon in cash forecasts, failing to track which positions are pledged under repo or as margin, and mishandling the delivery process when a short futures position goes into the delivery month. Because Treasury positions are often large and leveraged, small pricing or accrual errors can move NAV noticeably, so daily tolerance checks on price and yield changes are standard.
Example
A fund holds USD 10M face of a 4.5% 30-year Treasury bond. Each six-month coupon is USD 225,000, and interest accrues daily at roughly USD 1,223 on an actual/actual basis in a 184-day half-year.
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