How To Invest In Treasuries And Capture Today's Plump Yields (2024)

Ready to invest in bonds and Treasuries? Now's a good time: Lawmakers finally hammered out a debt-ceiling deal.

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With the debt-ceiling drama over, today's plump yields are a safer bet than other financial instruments again. Investors again know the U.S. will keep paying its bills and avoid a default. So, why not grab a sizable rate of return on a fixed-income asset that's still viewed as the globe's safest investment?

The days of zero rates are long gone after 10 rate hikes from the Federal Reserve. A six-month Treasury bill now yields nearly 5.5%, a one-year bill fetches 5.25%, two-year notes earn more than 4.5%, and 10-year notes sport a rate of 3.75%.

Here's a quick guide on why investing in Treasuries may be a smart move, how to buy them, and some strategies to lock in high yields.

Why Invest In Bonds And Treasuries Now?

What's the draw to invest in Treasuries? Higher yields.

Investors haven't been able to generate yields that outpace or keep pace with rising prices since the inflation genie got out of the bottle last year. Treasury bills with maturities ranging from three months to one year all yield more than the April consumer price index (CPI) of 4.9%.

"So, you're keeping your purchasing power, and last year that wasn't even remotely close to being the case," said Stash Graham, managing director at Graham Capital.

Today, the income-generating potential of Treasuries is the real deal. For example, two-year notes that paid a measly 10 to 20 basis points in interest (0.10% to 0.20%) back in 2020 during the pandemic now will pay you 4.58%.

"It's the best opportunity in terms of yield in this space since prior to the great financial crisis (in 2008-09)," said Sam Millette, fixed income strategist at Commonwealth Financial Network. "Bonds are acting like bonds again," as they are now working their magic again as a portfolio diversifier and contributing more to a total return portfolio.

Current yields on Treasuries are also better than many other types of bonds. That includes high-rated corporate bonds, which bear credit risk that Treasuries do not, adds Falko ho*rnicke, senior portfolio manager at U.S. Bank Private Wealth Management.

Invest In Bonds: Individual Treasuries Vs. Funds Or ETFs

First, you must decide how you want to invest in Treasuries. Do you want to buy Treasury bills, notes, and bonds and hold them until maturity? Or do you prefer to use a mutual fund or ETF that will expose you to thousands of Treasuries. This ETF strategy keeps desired duration exposure (e.g., six months, two years, five years, etc.) steady throughout your holding period.

Individual Treasuries you hold until maturity, however, pay you a fixed rate of interest on a periodic basis. They also pay your principal back at maturity. The benefit of this approach is you know exactly what you're going to earn. Plus you trim interest rate risk and have zero credit risk. Why no credit risk? Treasuries are backed by the full faith and credit of the U.S. government.

In contrast, Treasuries held through mutual funds and ETFsare not necessarily held to maturity. The portfolio manager buys and sells Treasuries as market conditions change and manages the credit quality, maturities, and duration of the bonds for you. "You get relatively static exposure," said Millette. Utilizing funds is a good option if you're trying to keep a consistent equity and bond exposure, such as a 60% stocks and 40% bonds mix, Millette adds.

Watch NAV And Expense Ratios

But there's a caveat when you invest in Treasuries: Funds and ETFs are liquid and allow you to trade easily. Yet there's a chance that the net asset value (NAV) of the fund will be lower than your purchase price. This could result in losses if you sell, says Graham.

When choosing a fund or ETF, the lower the expense ratio the better. You don't want fees eating into your returns. Passively managed index funds and ETFs, which track a specific Treasury index, are good low-cost ways to gain broad exposure to a market that is known for its efficiency.

Examples include Vanguard Short-Term Treasury ETF (VGSH) which tracks Treasuries with maturities of one to three years and charges 0.04% for expenses; iShares U.S. Treasury Bond ETF (GOVT), which provides broad exposure to the entire Treasury market with a fee of just 0.05%; and iShares 20+ Year Treasury Bond ETF (TLT), which charges an expense ratio of 0.15% and invests in Treasury bonds with maturities of more than 20 years.

Buying U.S. Debt Directly From Uncle Sam

Want to cut out the middleman and invest in Treasuries yourself? One option is to buy Treasuries at auction directly from the federal government. To do so, set up an account at www.treasurydirect.gov. It's akin to opening a checking or bank account.

The interest rates you'll earn on the Treasuries you buy are fixed. That means they won't change during your holding period. And, of course, you get all your principal, or initial investment, back at maturity.

This is a good option if you want to buy and hold your Treasuries until maturity. On Treasury bills with maturities up to a year, you'll get paid interest when the bill matures. Interest on Treasury notes and bonds are paid every six months.

"The big advantage of buying individual Treasuries is that you can pinpoint the maturity to exactly when you need the money," said Hornicke.

Investment minimums start at $100, and the maximum investment allowed is $10 million. "It's going to be a customizable, do-it-yourself solution," said Millette.

You can also buy Treasuries directly through a brokerage account at online brokerages like Charles Schwab (SCHW) and Fidelity Investments, says Ryan Stevens, a principal and lead financial planner at Kutscher Benner Barsness & Stevens. At the client's request, for example, Stevens will buy Treasuries through Schwab. He views the holding as a short-term cash equivalent. "We allow those positions to mature so that we don't eat into the expected holding period return," said Stevens.

Invest In Bonds By Building A Ladder

This period of high yields won't last forever, however. There's market chatter about the Fed lowering rates later this year or next. So, a way to lock in these higher rates for longer is to build a ladder of Treasuries that mature at different times. The approach is like building a CD (certificate of deposit) ladder.

Let's say you want to lock in today's rates for the next three years. If you have $10,000 to invest, you could divvy that money up equally and invest in six- and 12-month bills as well as a two-year note and three-year note. So, your yields will range from roughly 5.5% for your six-month bill to nearly 4.25% for the three-year note.

So, if the market expectation for rates to eventually fall is right, "What you're doing (with the ladder) is effectively locking in the current (high) yields for a longer period of time," said Millette.

Longer Duration Bonds Are More Sensitive

Another potential strategy to capitalize on an eventual decline in rates is to buy longer-dated Treasuries, such as the 10-year note or 30-year bond.

Remember, the price and yield of a Treasury have an inverse relationship. That means if interest rates fall, bond prices will rise. That boosts the capital appreciation of the Treasury. Since longer-duration bonds have more interest rate sensitivity (code word for larger price movements when rates go up or down), you'll get more bang for your buck via price appreciation, despite earning a lower yield in the short term than you would with shorter-duration Treasuries. "The longer the bond is to maturity, the stronger the effect," said Hornicke.

Looking for another option to invest in bonds? Consider fairly new, so-called single-bond ETFs. You can now get direct exposure to a single Treasury, such as the 10-year bond in a single investment, via an easy-to-trade U.S. Treasury 10 Year Note ETF (UTEN).

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