Treasuries are a risk-free way to invest your money.
While other types of bonds exist, investing in 2-year Treasuries have unique advantages.
Using the secondary market, savvy investors can build a Treasury ladder, helping them to maximize returns.
When it comes to the short term, the options for investors have been limited—not in the types of investments, but regarding the potential returns. Since 2009, the Federal Reserve has kept interest rates below 2.5%, making it difficult for investors to earn a decent return in the short term.
All of that changed with the events surrounding the pandemic. Government spending, supply chain issues, lockdowns, and more contributed to inflation.
To fight inflation, the Federal Reserve is raising interest rates. This means investors can earn a higher return on short-term investments, specifically Treasury bills. But are they suitable investments for you?
How Do Treasuries Work?
U.S. Treasuries are debt instruments backed by the U.S. government. Since most experts agree the U.S. government will not default on its debts, Treasuries are considered risk-free investments. In other words, there is an implied guarantee that you’ll get your principal investment back, along with interest.
The complication with Treasuries is how they are named. Treasury bills are bonds that mature in one year or less. Unlike traditional bonds that you purchase at face value and then earn a stated interest rate, Treasury bills sell at a discount to face value. When they mature, you receive the face value, and the “interest” you earn is the difference between your purchase price and the face value.
Treasury notes are bonds that mature in more than one year but less than 10 years. Treasury bonds mature in 10 to 30 years. In both cases, you purchase the bond for face value, and every six months, you earn the stated interest rate until the bond matures.
Investing In Treasuries
As of this writing, here are the current interest rates (APY) for various term Treasuries:
4-week: 2.68%
8-week: 3.05%
13-week: 3.37%
26-week: 4.00%
52-week: 4.15%
2-year: 4.34%
This is a risk-free rate of return that is hard to find in other investments. You could invest in I Bonds, which are yielding over 9% at the time of this writing. However, you cannot sell these for at least one year, and if you sell within the first five years, you forfeit three months’ worth of interest.
Compare the rate of the 52-week Treasury to high-yield savings accounts, and you are earning double that amount or more with the Treasury. Of course, you have to take into account inflation as well. With the August consumer price index (CPI) report, the inflation rate is 8.3%—double the Treasuries’ interest rate. In other words, you are still losing out to inflation by going this route.
The alternative option, the stock market, doesn’t offer a risk-free or guaranteed return either. Many economists believe that inflation will not be going any higher, so Treasuries could be a smart way to limit the loss of purchasing power.
Finally, consider what would happen if inflation fell over the next 12-24 months. If you think inflation will be below 4% within two years, then investing in five-year Treasuries and earning 4.15% is a great deal.
Treasuries vs. TIPS
TIPS, or Treasury Inflation-Protected Securities, act like traditional bonds but with a feature that allows the face value to change based on inflation. For example, if you purchase a 30-year TIPS bond with a 4% interest rate, you will earn 4% for the life of the bond. The face value, however, will go up or down based on inflation.
Earning interest, in addition to having the value of the bond increase in value, sounds like an ideal investment. The problem is there is risk involved with TIPS. If inflation drops, the bond will fall in value. So while you still earn the stated interest rate, it could be offset with the loss of principal.
Treasuries, on the other hand, will not lose value unless you sell them on the secondary market before they reach maturity. But if you invest strategically, using a bond ladder with various maturity dates, you should avoid running into this problem.
If you were to invest in a TIPS mutual fund or exchange-traded fund, you also open yourself up to principal loss here. Even if you don’t sell, but other shareholders do, the fund’s overall value will decline. This is evident in the iShares TIPS Bond ETF (TIPS), which is down 11% for the year as of this writing.
If you want to invest in TIPS, purchase individual securities and the shortest term possible (five years) to limit your potential losses.
Treasuries vs. Corporate Bonds
Corporate bonds have various maturity dates like Treasuries and pay a competitive interest rate, depending on the bonds rating. But the same issues we saw above with TIPS also play out with corporate bonds.
If you invest in longer-term corporate bonds, you can lose money if you have to sell before the bond matures. If you invest in a mutual fund or ETF, you will lose money as other shareholders sell. For example, the Vanguard Total Corporate Bond Fund (VTC) is down more than 18% for 2022 as of this writing.
To protect yourself, purchase individual corporate bonds for the shortest term possible or bond funds that have a short duration.
Are Treasuries Right For You?
At the end of the day, you have to look at your financial situation, goals, and risk tolerance to determine your best investment. There is no perfect investment to try to keep pace with rising inflation.
All you can do is make smart choices to protect your money and help it grow safely. For some investors, this might mean investing in Treasuries. For others, buying individual corporate bonds might make the most sense.
How To Buy Treasuries
There are two options for buying Treasury securities. You can visit TreasuryDirect.gov, where you can purchase them directly from the U.S. government. There are no fees or commissions. However, you can only access your bonds through this website.
The other option is to buy from a bank or broker. This is known as the secondary market, and it has its advantages and drawbacks. The benefit of this option is you can purchase Treasuries with different maturities. Since you can’t buy a four-month Treasury directly, you can purchase this term on the secondary market. The catch is it won’t be an exact four-month bond. Instead, it could be a 6-month bond that matures in four months.
The downside to the secondary market is you are likely to pay a fee or commission, and the interest rate you earn will be slightly less. However, most investors that go this route agree that the flexibility of bond terms and having all their investments with a single broker is worth it.
Finally, while you cannot purchase Treasuries through a Q.ai Investment Kit, there are various fixed-income kits to choose from that could offer you a similar risk profile, time horizon, and return as a bond. For example, the Inflation Kit invests in TIPS, commodities, and precious metals to help keep your cash from losing purchasing power.
Bottom Line
Now that the Federal Reserve is raising interest rates, short-term investors have more options for earning a competitive interest rate. The only thing left is figuring out which investment option makes the most sense for your goals, risk tolerance, and time horizon. Once you understand this, you will have a good idea of where to invest your money.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
