Typical investor

The typical investor in U.S. Government securities is a conservative, income-seeking investor, often older. There is no security with lower levels of default (credit) risk, since the chance of default is considered virtually non-existent. Federal debt levels are high, but the government prints its own money, so the likelihood of the Treasury being unable to make required interest and/or principal payments is very low.

Because these securities have very low credit risk, they typically offer lower yields. That lower yield is the tradeoff investors accept in exchange for safety, which is why U.S. Government securities are commonly used by conservative (low-risk) investors.

Treasury bills and CMBs are most suitable for investors who want to park cash in a safe, short-term investment. They don’t pay ongoing income, but their maturities can be very short (as short as a month for T-bills and as short as a day for CMBs), so investors get their money back quickly.

Treasury notes and bonds are suitable for investors seeking ongoing income over longer periods of time. Investors in longer-term Treasury products need to be comfortable with additional risks, such as interest rate risk and inflation risk.

STRIPS and Treasury Receipts are long-term zero-coupon securities, so they aren’t suitable for investors seeking current income. They’re designed for investors who want a payout in the future but don’t need income along the way. Many investors use them in retirement plans when income isn’t needed for a long period of time. In addition, the retirement plan can shield the investor from phantom tax. Young parents also use these securities to save for a young or unborn child’s education (usually college).

Mortgage-backed securities, which include pass through certificates and CMOs, are suitable for conservative investors seeking consistent income. These securities typically pay monthly income and are often AAA (or highly) rated. However, conservative investors should avoid private label CMOs and CDOs.