Treasury bonds are far more attractive income investments than they were a few years ago.
Treasury bonds pay risk-free interest, and their yields have more than doubled over the past year alone. So, while these instruments haven't been the most attractive income investments in recent years, it might be a smart time for long-term investors to take another look.
Before we dive in, it's worth mentioning that there are three different types of Treasury securities -- bonds, bills, and notes. Treasury bonds technically refer to those maturing in 20 years or more, while Treasury notes come in two, three, five, seven, and 10-year maturities. Treasury bills are short-term investments, with maturities of one year or less. While this article is about long-term Treasury bonds, much of the reasoning can apply to all three varieties.
1. The highest yield in 12 years
As of this writing in late October 2022, 20-year Treasury bonds have a 4.63% yield, while longer-dated 30-year Treasuries are yielding 4.38%.
Just one year ago, the 30-year yield was about 1.96%, and the year before it was even lower. In fact, Treasury bond yields are the highest they've been since 2010. In short, they are far more attractive as income investments. $10,000 worth of 30-year Treasuries will pay you $438 per year for three decades.
2. Risk-free income
Not only are Treasury bond yields higher than they've been in years, but they are completely risk-free -- at least in terms of the income they produce. Treasury bonds are backed by the U.S. government, so the likelihood you won't get paid as agreed is extremely low. This is in contrast to corporate bonds, which are only as strong as the company that issued them.
To be sure, there are some other forms of essentially risk-free income investments. CDs, for example. But they generally don't pay quite as much as Treasury bonds.
3. State tax benefits
The income paid by Treasury bonds is considered taxable income in the eyes of the IRS. However, interest income from Treasury bonds (or any other type of Treasury security) is exempt from state and local taxes.
4. Several ways to buy (and sell)
You can buy Treasury bonds directly from the government in $100 increments at TreasuryDirect.gov, or through an online broker. And if you don't want to own Treasury bonds directly, there are plenty of mutual funds and ETFs that can allow you to get exposure to Treasury securities.
You can also sell Treasury bonds fairly easily through a broker prior to maturity if you need to cash out. So you aren't exactly locked in for a 20-30 year period, although it's worth noting the market value of Treasury bonds can vary significantly over time.
5. Market uncertainty
Last, but certainly not least, Treasury bonds can be a great way to get a reasonable rate of return on your investment dollars without putting your money in the stock market. If the recent market turbulence has been a little too intense, Treasury bonds can put your money to work while still letting you sleep soundly at night.
Downsides of investing in Treasury bonds
It's worth mentioning that investing in Treasury bonds has some downsides as well. For one thing, Treasury bonds can have significant price volatility over time, especially in the early years when they have decades to maturity. Without getting too deep into the mathematics, if market interest rates rise, values of existing Treasury bonds can fall.
There's also the issue that Treasuries pay interest semi-annually, which can be inconvenient for people who rely on their investments to cover their day-to-day expenses.
The bottom line on Treasury bonds
Treasury bonds are certainly more attractive than they were a few years ago, but it's important to keep in mind there's no such thing as a perfect income investment. Be sure to consider all of the pros and cons before investing.
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As a seasoned financial expert with an in-depth understanding of income investments, particularly Treasury bonds, let's delve into the evidence that supports the claim that Treasury bonds are currently more attractive income investments than they were in previous years.
Firstly, the article highlights the substantial increase in Treasury bond yields over the past year. As of late October 2022, 20-year Treasury bonds offer a 4.63% yield, and 30-year Treasuries yield 4.38%. This represents a significant surge compared to just one year ago when the 30-year yield was approximately 1.96%. The noteworthy point is that these yields are the highest they've been since 2010, making Treasury bonds far more appealing as income investments.
Secondly, the author emphasizes the risk-free nature of Treasury bonds, attributing this safety to the backing by the U.S. government. This feature sets them apart from corporate bonds, which are contingent on the financial stability of the issuing company. This distinction underscores the reliability of Treasury bonds as a source of income.
Furthermore, the article mentions the tax benefits associated with Treasury bonds. While the income generated by these bonds is taxable at the federal level, it is exempt from state and local taxes. This tax advantage adds another layer of attractiveness for investors seeking income with favorable tax treatment.
The flexibility in purchasing and selling Treasury bonds is another crucial aspect. Investors can acquire them directly from the government in $100 increments at TreasuryDirect.gov or through online brokers. Additionally, there are mutual funds and ETFs available for those who prefer indirect exposure to Treasury securities. The ease of selling Treasury bonds before maturity provides liquidity, offering investors an exit strategy if needed.
The article also addresses the role of Treasury bonds in providing a reasonable rate of return without the volatility associated with the stock market. In times of market uncertainty, Treasury bonds offer a stable alternative for investors who prioritize capital preservation.
Despite these advantages, the article does not shy away from discussing the downsides of investing in Treasury bonds. It acknowledges potential price volatility, especially in the early years, and the inconvenience of semi-annual interest payments for investors relying on income for day-to-day expenses.
In conclusion, the article makes a compelling case for the attractiveness of Treasury bonds as income investments in the current financial landscape. The evidence presented underscores the higher yields, risk-free nature, tax benefits, and flexibility associated with these bonds, making them a worthy consideration for long-term investors. However, the article also encourages readers to weigh the pros and cons carefully before making investment decisions.
