Do you want a risk-free return of 4%? How investors can buy a simple treasury
The rise in short-term Treasury yields may prompt some investors to consider adding the notes to their portfolio. The yield on the 2-year Treasury passed 3.9% on Friday, the highest level since 2007. Bond yields move inversely to prices. The two-year note is at the point on the Treasury yield curve most sensitive to rate hikes by the Federal Reserve, which is expected to raise rates for the fifth time this year next week in an effort to curb inflation. In August, the consumer price index rose 0.1[ads1]%. Economists surveyed by Dow Jones expected a 0.1% decline. With the yield curve inverted, short-term certificates now have higher returns than long-term ones. Bond king Jeffrey Gundlach, CEO of DoubleLine Capital, said in a webcast Thursday that after several brutal years, the bond market is now the place to be. “The opportunities are more exciting now than at any time, in my view, in the last 10 years,” he said. Gundlach’s firm bought long-term Treasuries last week. CNBC’s Jim Cramer, on the other hand, bought 2-year Treasuries this week for his personal portfolio. For the first time in a long time, returns are more competitive with equity returns, he said. With short-term notes, investors can get the high yield without a long-term commitment. For those looking to get a piece of the action, here’s what you need to know. Buying from the Government You can buy Treasurys directly from the US government through their website, TreasuryDirect.gov. You must create an account and connect the bank to the website. The notes are sold in increments of $100 and are usually issued within a week of the auction date. Auctions for the 2-, 3-, 5- and 7-year Treasuries take place every 4 weeks, while the 10-year auction takes place quarterly. Buying the notes makes income planning easy. “If you buy an individual Treasury and hold it to maturity, you know what your interest is going to be and you know what your maturity value is,” said chartered financial analyst Tim Utecht, chief investment officer at Life Planning Partners, based in Jacksonville, Fla. . “You know exactly what you’re going to get.” You will be paid interest twice a year, and if you hold the Treasury until it matures, you are not affected by market risk. The downside to owning the security instead of investing in a Treasury fund is the lack of diversification, unless you’re raising bonds yourself. You also need to make sure you buy the right treasuries based on your goals and time horizon. The investments are also separate from your other accounts, said certified financial planner Diahann Lassus, managing principal at Peapack Private Wealth Management in New Providence, New Jersey. “For people who want to see everything together, it’s a little more difficult,” she said. You also can’t buy them in your IRA or Roth IRA, which Lassus believes is the biggest drawback. If you want to sell the bond before it reaches maturity, you cannot do so on the government’s website. Instead, you must transfer it to a bank, broker or dealer. Buying through a brokerage house You can also buy government bonds on the secondary market, go through a brokerage firm. You will still get all the benefits of owning the security directly. For Utech, this is the easiest way to buy the bonds, calling the government’s website “a bit cumbersome.” Online brokers such as Fidelity and Charles Schwab have tables that show the yield on various Treasuries so you can compare products, he said. In addition to offering secondary market bonds, both Fidelity and Schwab sell new issues of Treasurys. Also, be aware that you may not get the exact time horizon on the note on any secondary Treasury purchases, Utech said. Be sure to check any minimum purchase requirements and fees. At Schwab and Fidelity, for example, buying Treasurys online is free, but a broker-assisted trade is $25 and $19.95, respectively. At Fidelity, the minimum purchase is $1,000 for Treasury bills. What Lassus likes about going through a brokerage is the fact that you have the ability to have your investments pooled, and you can even add them to an IRA or Roth IRA, she said. Investing in a fund You can also gain exposure to the bond market through mutual funds and exchange-traded funds. “It provides immediate diversification,” Lassus said. For example, a short-term government bond fund may have problems with maturities of between one and three years. You can buy them through your brokerage, which can also make it easier to track performance alongside the rest of your holdings. See below for four short-term treasury funds. However, funds can suffer from price dislocation in a year like this and you have the prospect of losses. Income payments can also fluctuate since you have different bonds in the fund. Be aware of any fees, which can take a bite out of your return. The funds also have turnover and are therefore subject to capital gains tax, unlike individual bonds.
