This column has been updated to correct the return on investment.
Can you make good money on short-term US Treasuries? Current yields exceed 5% on one- to six-month durations, and money gurus and analysts alike are shouting from the rooftops that it’s time to buy. With the debt ceiling debacle looming, yields could continue to rise on shorter-term investments like Treasuries, which have maturities of up to a year. Meanwhile, long-term Treasuries and bonds, which have maturities of two to 30 years, could fall.
If your portfolio is worth billions, like financier Bill Gross, or you’re managing trillions of institutional money, this kind of fast-moving strategy makes sense. These types of investors move through piles of money every day.
But what if you’re just an ordinary person investing on their own? It sounds great to earn more than 5% on a risk-free investment, but if you only invest a portion of your cash bucket for a few weeks, you’ll earn pocket change and have to pay taxes on the gain and potentially pay fees. With $1,000, you’re talking about a $50 profit.
Yes, you can do this over and over and earn a good amount of interest on your principal. But with short-term Treasuries in a volatile market, there’s no guarantee that when you go to roll over your investment for another round, the rate will be as high or higher than what you could get with a CD , a high-yield savings account, another duration of Treasuries or even Series I bonds.
“We see very little risk premium moving right now from short-term Treasury bonds to long-term corporate or municipal bonds,” says Scott Bishop, a Houston-based certified financial planner with Avidian Wealth Solutions.
Build a ladder
What you really need is a long-term solution as an individual investor, whether you have the professional help of a financial advisor or go it alone. Bishop structures fixed income ladders for its clients, meaning you have fixed income investments with multiple maturities in a row. When a ladder appears, look at the market conditions and decide where to deploy the free cash next. If things change significantly between tiers, he contacts clients and talks about speeding up the process, cashing out an existing Treasury position and buying new securities at better rates.
You have three options for buying Treasury bills in your scale, and each has its own pros and cons.
Buy direct bonds
You can buy new Treasury bonds at auction directly from the US government without an intermediary at TreasuryDirect.gov. The process is painless: create an account, attach a bank account and click buy, just like any other retail purchase. But the Treasury website is notoriously dodgy and has many layers of security. Also, your holdings aren’t easily integrated with the rest of your money, so it’s hard to see everything at a glance.
The biggest quirk is that when you buy from an auction, you select an auction duration and date, for example 8 weeks to sell on May 11th and it will issue on May 16th. But you won’t see the exact price or performance until you actually get sales confirmation. You can check current yields elsewhere, but it won’t be there when you buy. Also, you won’t have immediate liquidity during the term of the invoice and will have to jump through some hoops to sell.
At the time of purchase, you can choose to automatically reinvest your purchase after maturity for up to two years, or you can schedule the funds to arrive in your bank account and figure out what to do from there.
Buy from a broker
There is a little more flexibility and information available at checkout when you go through a broker, but some may charge you for this convenience. You’re not giving up a huge cut, but enough to affect a $50 return.
Still, Bishop not only feels comfortable with his clients going through letter brokers, he also recommends it. You’ll still have full government protection and get the necessary tax information you need. “I’d rather have individuals buy them from brokers than have to worry about tracking them on a government website,” he says.
At the broker, you will buy through its fixed income section and you will be able to select a range of Transit bonds at different prices and yields, because you will be buying in the secondary market and not directly at the Government auction.
You’ll see a dashboard that shows various durations, yields, and other information, and then you can click and buy. The price will be displayed at a discount to the face value based on performance. Basically, using round numbers at 5%, you’d buy it for $950 and when it matures you’d get $1,000. “Because T-bills are sold at a discount to the face value of the bond, investors earn the difference at maturity based on market fluctuations,” says Mark Hamrick, senior economic analyst at Bankrate.com.
Some brokers will help you build a Treasury ladder (or CD, or other fixed income products) with their own tools. But you can also do it on your own by selecting options at different maturities and then continuing the chain as each one matures. You can charge on demand.
Buy Treasury ETFs
Your best and easiest option as an individual investor might be to invest in Treasury ETFs instead of buying them individually and handling the entire process yourself. Although bills are a fixed-income security, they are grouped together as exchange-traded funds and you can buy them under their ticker wherever you have an account, usually without transaction fees. You’ll pay a fee as an expense ratio, but ETFs traditionally have low fees. The iShares SGOV 0-3 Month Treasury Bond ETF,
is 0.15%, for example.
You can also scale them up, choosing a mix of short-term Treasuries, mid-range Treasuries and long-term Treasuries options. You can cash out whenever you want, but you can also keep the ETF and not have to do anything to reinvest. For long-term investors, it is the easiest to allocate and redistribute.
“For clients who are fully deployed in the market, we’ve de-risked a bit to move into more value (high quality) and also move away from some of the riskier parts of the markets and added some Transit Bond ETFs ” says Bishop. “Most have been very comfortable that they didn’t want excess risk now with the valuations in the markets they’re in.”