What I’m hearing from so many people right now is they want safety, and the safest thing you can do is a treasury. Of course, these are bonds. When you buy a bond, what you’re doing is loaning money to someone. In this case, you’re loaning money to the U.S. government. Heaven knows they need the money right now with the deficits.
We have three main types of treasuries. These are basically based on their maturities. We have things called T-Bills, and they have maturities up to one year and can even start as little as three months. Then, we have Treasury Notes whose maturities are up to five years. And Treasury Bonds are anything from ten to thirty years. But they’re all treasuries, all loaning the government money.
Now, you have to remember again that they’re bonds, but the T-Bills work a little bit differently in that the interest rate is built into the purchase. You buy them at a discount. So a $10,000 bond may only cost you $9,800, for instance, and when it matures you get the full $10,000 back. But your notes and your bonds work a little bit differently in that you pay $10,000 for it, you get interest twice a year and at maturity, you get the full $10,000 back if that’s what you have loaned the government. So they work a little bit differently and have a little bit different names depending on the maturity.
And the rates on these? Terrible. CD (Certificate of Deposit) rates are not good—I’m hearing complaints. But I also tell people: We don’t really have inflation or not much inflation, so those numbers are real returns that you are getting. So don’t worry about those low rates. But treasuries are, relatively speaking, safer than CDs, and for that reason those rates are lower. A two year note will only pay you about half a percent. And you’re going to have to go to thirty years to get a four percent rate. So it doesn’t entice too many people, but if you’re looking for safety, that’s what you might do.
If you want to know how to buy them, you can go through your local broker, or you can go directly to the U.S. government through their Treasury Direct Program dealing with the Federal Reserve Bank and buy them for as little as $1,000.
These aren’t like CDs, so you aren’t penalized if you end up needing the money out. This is because these treasuries are very marketable, meaning you can sell them to someone else. So even if they haven’t matured yet and you need your money or want to invest in something else, you sell them to another investor on the open market.
If the treasury is in a taxable account, you will pay taxes on the interest. You need to understand this is not like dividends and capital gains. It is interest, and it is taxed at your income tax bracket.
As far as when interest rates will go back up, well, when the economy gets better and when we see inflation come into the picture, which is not a good thing, those interest rates will start to rise, because, of course, that is the price of money. When we have too much money floating around, that’s what happens.
Regarding concerns about deflation, I tell people: When they look at CD rates and treasury rates, don’t worry about it. If you need to keep your money safe, go ahead and choose some of these. Ladder them with different maturities so when those bonds mature, hopefully we’ll have some better rates come on the horizon.