Negotiating Today’s Shifting Treasury Yields
To beginning investors, it may seem that there are neat cycles in which all interest rates rise and fall in unison. The truth is more chaotic than that, but that disorderliness can create opportunities.
When you think about whether interest rates are rising or falling, it is important to specify which interest rates you mean. For example, credit cards were barely affected by the huge drop in rates from 2008 to this year, while savings account rates dropped to nearly zero and mortgage rates reached record lows. More recently, while mortgage rates have been rising in recent months, savings and money market account rates haven’t budged.
Even among similar types of rates, movements come at different times and to different degrees depending on the length of the instrument. Thirty-year mortgage rates move differently from 15-year mortgage rates. Five-year CD rates move differently from one-year rates. Treasury securities offer a range of time periods from one month to 30 years, and recent differences in movements across the Treasury yield curve are worth a closer look by investors who seek income-oriented investments.
A New Twist in Treasuries
In early May, 30-year Treasuries were yielding 2.87%, compared to 0.11% for one-year Treasuries, and 0.03% for one-month Treasuries. That gave 30-year Treasuries a 2.76% advantage over their one-year counterparts, and a 2.84% advantage over the one-month alternative.
How have things changed since then? It depends where you look. Short-term yields have fallen slightly, while the long-term yield has risen significantly. By the end of September, 30-year Treasuries were yielding 3.68%, while 1-year Treasuries were at 0.10 and 1-month Treasuries were at 0.02. That widened the advantage of 30-year Treasuries to 3.58% over one-year securities and 3.66% over one-month Treasuries.
In a few short months, yields on Treasuries have started to look more attractive — if you look at the long end of the yield curve.
What You Should Know About Buying Treasuries
If those Treasury yields look tempting, here are three things you should know about buying these securities.
- Income investors should take a buy-and-hold approach. Be advised that long-term Treasury prices can fluctuate wildly. However, if you are buying for income, you should be unaffected by those fluctuations as long as you take a buy-and-hold approach, in which case your income payments until maturity are guaranteed, and the face value of the security is guaranteed at that point as well.
- They are best bought in bulk. Treasury securities can be bought with reasonable efficiency in face-value blocks of $10,000 or more, so they are best for fairly significant commitments rather than smaller, incremental investments.
- Bond funds may not deliver enough income. A bond fund may allow for smaller investments, but be advised they may not deliver the same amount of income you think you are getting from the bond market. Mutual fund fees will take away a slice of that income, and whether you get the same yield as a buy-and-hold approach will depend on the bond manager’s investment decisions.
Treasuries may sometimes seem like the “plain vanilla” portion of a portfolio, but as their yields rise, they may start to seem a little tastier to income-starved investors.
Frequently Asked Questions
Q: I’ve been looking into alternatives to CD rates, since they are so low these days. I noticed that five-year Treasury bonds are paying 2.30 percent, which is higher than most of the CD rates I’ve been seeing. Any reason I shouldn’t put my money in Treasuries instead of CDs?
A: The contrast between CD rates and Treasury bond yields right now is interesting. CD rates are higher for short-term periods, but once you get to around the two-year mark, Treasury yields start being higher. By the time you get to five-year terms, Treasuries are yielding around 2.30%, while the average CD rate at that length is just 1.58%.
So, does that mean that U.S. Treasury bonds are a viable alternative to CDs for the average depositor? It’s not as clean a fit as you might think, for the following reasons:
- Trading Treasury bonds in small denominations (certainly, less than $10,000 face value) can be expensive. The upshot is that the yield you see listed may not be the yield you get once trading spreads are factored in.
- Treasury bonds will fluctuate in price. This can go for you or against you, but be advised that unless you buy and hold a bond to maturity, you might not get the yield you thought you were buying.
- Bond funds have a couple drawbacks. Bond funds can be a way for smaller investors to get into the bond market, but they carry fees that will chip away at the yield you could be earning. Also, active trading may mean that you never realize the yield you think you’re getting.
A more practical strategy might be simply to shop for the best CD rates. While average five-year CD rates are at 1.58%, the best CD rates at that length are above 2.50%. That’s even better than five-year Treasury yields–and without the complications.
