Does the wildly volatile stock market have you looking for a safe haven to invest your money? There’s no safer place to invest than United States Treasury bonds. Here’s why — the US Government guarantees you will get all interest when due and get your principal back at maturity. There is extremely large amount of demand for Treasuries around the world these days. So let’s take a look at how and why Treasuries should be a key part of your portfolio.
Treasury bonds are very much in the news today because the Treasury is issuing so many of them because Congress has been passing these rescue packages and they need to be financed by trillions of dollars. The Treasury is going to issue over 3 trillion dollars worth of new bonds in the second quarter alone, after having issued over one trillion dollars worth of bonds in the first quarter. That means that the national debt, which started this year at about $22 trillion, is going to be up to about $26 trillion by the middle of 2020! Despite this massive issue of new bonds, yields on Treasury bonds have actually fallen this year because so many people want to put their money into them as a safety haven. 10 year Treasury bonds, the benchmark, are now yielding about 0.6% and 30 year bonds are yielding just over 1%. Unlike municipalities or corporations, the U.S. Government is the only entity that can actually print the money it needs to pay interest and principal on the bonds. They can also raise taxes to repay the bonds. Since the full faith and credit of the U.S. Government is behind these Treasury bonds, they are considered virtually risk free.
There are many maturities for Treasury bonds, from three months to as much as 30 years. Normally, the longer you commit your money, the higher the yield you’re going to get. But right now the difference between the short term and long term bonds is very slight. Most Treasuries cannot be redeemed early by their issuer, as can happen with corporate or municipal bonds. Interest paid on Treasuries is not taxed at the state and local level, which makes them more attractive to investors in high tax states.
You can buy Treasuries directly from the Treasury online, or from most banks or brokerage firms. But it may be easier to buy them through exchange traded funds or mutual funds that have the name Treasury in them because they are diversified and never mature. All the major mutual fund companies, such as T.Rowe Price, Vanguard and Fidelity offer Treasury bond funds.
The biggest risk of owning Treasury bonds is their value will drop sharply if interest rates were to rise. But with the economy so depressed because of the pandemic right now, that’s not really too much of a risk for the next few years. Most financial experts say that is does make sense to have some Treasuries and Treasury bond funds in your portfolio to offset the risk of stocks. The older you are, the more you should have in Treasury bonds because you don’t have the time to wait for your stocks to bounce back. So even though the government is issuing a ton of new bonds these days, Treasuries should play an important role in your portfolio.
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