You’ve heard of blue-chip stocks - they’re considered the highest quality stocks on the market. But did you know that they have a counterpart in the world of fixed-income investments? They do - Treasuries, which are bonds issued and guaranteed by the US government.

The risk/reward tradeoff
Treasuries are generally regarded as the nation’s highest quality bonds with minimal risk that the government will “default” or fail to pay the interest and principal on time. Their quality attracts investors seeking to balance the risk of equities as well as retirees and others pursuing income potential.

Like other bonds, Treasuries may help investors diversify. Bond prices don’t always move in tandem with stock prices, so holding both in a portfolio creates the potential for gains in bond investments to help offset losses in stock investments, or vice versa.

While Treasuries may be safer than other bonds, they still involve risks. One of these is market risk, which is the fluctuation of a bond’s value resulting from changes in market conditions. Treasuries also involve inflation risk — the risk that an investment’s total return will not stay ahead of inflation.

How they differ from agency bonds
Treasuries aren’t the only type of bond available from the federal government. Others are issued by agencies and government-sponsored entities such as the Federal National Mortgage Association. However, because these government agency bonds aren’t directly issued by the US Treasury, they aren’t necessarily backed by its full faith and credit. As a result, they’re considered to have a higher risk than Treasuries but may offer higher yields.

Given the challenge of researching and evaluating individual bonds, many investors decide to pursue their goals through mutual funds. Funds may provide broader diversification than you could achieve by assembling your own portfolio of bonds. They also typically offer convenient options for distributing income you may need from your investments.