• Sun. Jan 29th, 2023

5 Reasons Why Treasury Bonds Are a Decent Investment Right Now

ByThe Motley Fool

Nov 12, 2022
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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.

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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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