From Tesouro Direto to US Treasuries

If you put money into títulos públicos through Tesouro Direto before you moved, you already know the idea behind US Treasury securities: a government borrows from the public and pays the money back on a set date, with interest. This lesson describes Tesouro Direto as it works today, then what the United States Treasury sells, and then what is different: the currency, buying and selling, and tax.

What Tesouro Direto is

Tesouro Direto is a program of the Tesouro Nacional, the national treasury of Brazil, that sells federal government bonds (títulos públicos) to individuals over the internet. The Tesouro Nacional issues those bonds and pays them in reais, and people buy them through financial institutions authorized for the program. The Tesouro Nacional says the program was designed in 2002 to open access to these bonds.

The program offers three main kinds of return. Tesouro Selic follows the Selic rate, the basic interest rate of the Brazilian economy, plus or minus a small rate fixed at purchase. Tesouro Prefixado carries a rate fixed on the day of purchase. Tesouro IPCA+ pays a fixed rate plus the change in the IPCA, the official inflation index in Brazil.

The Tesouro Nacional buys the bonds back on business days, and the price of a bond is adjusted daily to market conditions and interest rates, which Brazilian official material calls marcação a mercado. Sell early and you get that day's price. Hold to maturity and each kind pays by its own formula: the rate fixed at purchase for Tesouro Prefixado, the Selic rate over the period with that small adjustment for Tesouro Selic, and the fixed rate plus IPCA inflation over the period for Tesouro IPCA+.

What the US Treasury sells

The US Department of the Treasury sells several securities to the public through the TreasuryDirect website. Treasury bills run from 4 weeks to 52 weeks, are sold at a discount or at face value, and pay face value at maturity. Treasury notes run 2, 3, 5, 7 or 10 years and Treasury bonds run 20 or 30 years, and both pay a fixed rate of interest every six months until they mature.

Treasury Inflation-Protected Securities (TIPS) run 5, 10 or 30 years. The principal goes up with inflation and down with deflation, measured by the US Consumer Price Index. At maturity you get the adjusted principal or the original principal, whichever is greater. TIPS are the closest US counterpart to Tesouro IPCA+, which does not make the two the same product.

Series I savings bonds are not traded and are bought only inside a TreasuryDirect account. Their rate combines a fixed rate that never changes with an inflation rate reset every six months, they can be cashed after 12 months, and cashing before five years costs the last three months of interest.

Marketable securities are bought in a TreasuryDirect account or through a bank, broker or dealer, starting at $100. A TreasuryDirect account for an individual takes a Social Security number, a United States address of record, a bank account and an email address.

A Treasury bill, step by step

Say you buy a 52 week Treasury bill with a face value of $1,000 and you pay $960 for it. Nothing arrives in between: at maturity the Treasury pays you $1,000, and the $40 difference is your interest.

Selling earlier is possible, because these securities are marketable: they can be transferred and sold before they mature. Selling goes through a bank, broker or dealer, and a security bought in TreasuryDirect has to stay there 45 days first. The price is whatever the market pays that day, and it is not fixed in advance.

The Securities and Exchange Commission, the US securities regulator, explains that market interest rates and the prices of fixed rate bonds move in opposite directions. In its own example, a 10 year Treasury security with a 3% coupon and a $1,000 face value is priced around $925 one year later if market rates rise to 4%.

How the interest is taxed

Under US rules, interest on Treasury bills, notes and bonds is subject to federal income tax and exempt from all state and local income taxes, and the same exemption applies to TIPS and to Series I savings bonds. IRS Publication 550 explains that people holding TIPS report each year both the interest and any increase in the inflation adjusted principal, shown on Form 1099-OID, while savings bond interest is generally not counted until the bonds mature or are cashed. Other interest of $10 or more is usually reported on Form 1099-INT.

Brazilian rules keep applying to what is held in Brazil, where earnings in Tesouro Direto have income tax withheld at a rate that falls the longer the money stays invested. Tax, reporting and benefit rules can apply in both countries at the same time, and a licensed professional who knows both systems can look at the details.

What to remember

• Tesouro Direto sells bonds issued by the Tesouro Nacional and paid in reais; Treasury securities come from the US Department of the Treasury and are paid in US dollars.
• Bills, notes and bonds pay fixed amounts; TIPS and Series I savings bonds follow inflation as measured in the United States.
• Sold before maturity, a marketable security can be worth more or less than you paid. Held to maturity, bills, notes and bonds pay face value, and TIPS pay the adjusted or original principal, whichever is greater.
• Treasury interest is taxed federally, exempt from state and local income tax, and usually reported on Form 1099-INT, or Form 1099-OID for TIPS.