Unique opportunities in treasury bonds

Most media coverage we hear is about the stock market. But did you know that the US bond market is twice the size of the stock market? And half of the bond market consists of treasury bonds alone. There are big shifts happening in the treasury market and new investment opportunities are now re-surfacing. While rising rates are causing big losses in the stock market, the treasury market is poised for big gains. Short-term treasury bonds are now yielding close to 5% on average, compared to less than 1% a year ago.

Here’s our latest video on what’s causing this shift and how you can take advantage of the higher yields in treasury bonds.

What is causing the market moves in treasury?

The Fed recently raised interest rates another three quarters of a percent. This is part of a series of interest rate increases the Fed has been orchestrating since earlier in 2022. As a result, yields on a 1-year treasury bond has climbed up to close to 5% compared to less than 1% a year ago. This is a very steep rise and one that will allow investors to reap much higher returns in treasury bonds than in previous years.

What are treasury bonds?

A treasury bond is a loan to the US government. When you buy a bond, you’re loaning money to the federal government, and the federal government backs the loan with its full faith and taxing power. So in terms of getting your money back, there is no other financial instrument, that’s of higher quality than a treasury bond. If it’s a 5-year bond, the government pays you interest for that period and at the end, you get the principal back.

Why are treasury bonds and in particular, short-term treasury bonds so attractive right now?

Normally, the longer the bond, the better the yields, meaning a 5-year bond will give you better returns than a 1-year bond. But because the Fed is increasing the short-term rates so rapidly right now, it’s made the short-term bonds, especially the 1- and 2-year bonds, yield even more than longer-dated bonds. 1-year treasury bonds and anything shorter than that are called treasury bills.

So there is a real opportunity for investors to invest in these 6- month and 1-year bonds that are very safe because it’s backed by the US government and still make a decent return. If you hold these bonds to maturity, you’re guaranteed to make the interest stated on the bond. Now if you need to sell the bond before it matures, you can sell the bond without a penalty. But bear in mind, if the interest rate has moved up since you bought the bond, you might make less money on the bond as your bond is now less attractive than what’s available in the marketplace.

So, when should you buy treasury bills?

There are two scenarios under which you might consider buying treasury bills. First, if you need to save and park your cash for a short-term expense, that’s coming up in the next year or so, like buying a house or remodeling or paying for your children’s college or any other big short-term expense you might have. The second is to diversify your portfolio. If you have money invested in stocks and more volatile Investments, an allocation to treasury bonds can be a good way to diversify your portfolio and cushion your portfolio while we’re going through this volatile period in the market.

Lastly, where can you buy treasury bonds?

The easiest way to buy treasury is through your financial advisor or brokerage firm. If you would like to speak with us about treasury bonds or would like for us to review your investment portfolio and give you our insights, please book a free consultation below: