Safer Than Houses — How to Invest in Treasury Bonds

Key takeaways

• Rising interest rates have increased Treasury bond yields, with a two-year note at 4.6%
• TIPS are also an option at the moment given inflation is stickier than Fed officials want to see
• Bonds and TIPS can be invested in via the US government or brokers

As the economy struggles with sticky inflation and the Fed considers yet another interest rate hike in June, many’s attention has turned to bonds which are becoming increasingly tempting investment options. The government issues these ‘failsafe’ assets, but how do they work and how can you count them as part of your portfolio? Read on to find out.

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Why invest in Treasury bonds?

A Treasury bond is when the US government issues debt to raise money. When you buy a bond, you’re paying the government the money it needs and it then pays you interest until the loan is up.

Treasury bonds are considered a go-to investment during more challenging economic times because the US economy is considered to be super stable (apart from when the US government nearly blows up the economy and defaults on its debt, but we won’t discuss that).

Bonds don’t swing wildly in price like stocks, so they’re a good asset in any portfolio as a failsafe. They usually correspond to interest rates. If the Fed needs to raise them further, bond yields could continue to rise — making them an attractive investment option in a difficult economy.

Treasury Inflation-Protected Securities (TIPS) offer some hedging against inflation, as their value adjusts to reflect the current interest rate as indicated by the consumer price index (CPI).

How to add bonds to your portfolio

With that context, investors might want to add Treasury bonds or TIPS to their portfolio. You can buy two different types of bonds: Treasury bills, which are shorter-term bonds, and Treasury notes which are two to ten years.

You can purchase both bonds and TIPS directly from the US government at TreasuryDirect, which manages the sales, for a minimum of $100. Savings bonds are also only available through the government.

As for other options, bond index funds and ETFs offer another way to take advantage of higher bond yield rates. This way, you can diversify your investment without buying individual TIPS, but brokerage fees can be associated with the funds.

The bottom line

Treasury bonds are always a good option for a portfolio, but they take on even more importance once the economy starts to go south. The best way to weather any financial storms is to diversify assets where possible so bonds could be a good, low-risk option for investors.

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Download Q.ai today for access to AI-powered investment strategies.