Should You Invest in US Treasury Bonds?

government bonds

Investors looking for low-risk instruments often turn to US treasuries, particularly T-bonds. These debt obligations are highly liquid and backed by the government, which makes them safer than stocks. On the downside, they typically offer lower yields than corporate bonds. Here are the key things to know about investing in US treasuries in 2022.

Individuals, institutions, and governments may purchase Treasury bonds USA at official auctions or on the secondary market. The strength and size of the US economy and the government’s taxing power make them relatively reliable. These securities mature in 20-30 years, and they should not be confused with T-bills and T-notes, whose maturity is shorter. 

Types of Bonds

The term to maturity varies from 4 weeks to 30 years. The longer it is, the higher the coupons. Some treasuries come without coupons, and some are classified as treasury-inflation-protected securities (TIPS). This means that both the principal and returns may change based on the dynamics of the consumer price index.

Overview of Risks

Despite their relative stability, treasuries are not completely risk-free. Like any type of bond, they have the risk of default, although it is lower than for other instruments. Here are the key things to bear in mind:

  • Investors typically receive less interest in comparison with other types of securities.
  • Fluctuations in interest rates affect the value of treasuries. The sooner they reach maturity, the lower their volatility. 
  • Prices decrease when interest rates rise.
  • Yields may be lower than the inflation rate unless you purchase TIPS.
  • Investors should keep track of current events in the national economy, particularly the proportion between national debt and GDP, the strength of the US dollar, and treasury yields to detect signs of default risk. 

Where to Buy 

Investors willing to buy treasury bonds can do this directly from the official website (TreasuryDirect). They are also available through brokers and banks. Many central banks outside the US have large amounts of treasury bills. For example, Japan and China own bills worth over $1 trillion each. 

Foreigners can buy US government bonds provided they have a US tax identification number. US citizenship is not required.

government bonds

Who Should Invest in Bonds?

US treasury bonds have a lower interest rate than bonds of emerging economies, such as Brazil. However, they are also more reliable in terms of credit and market risks. T-bonds are primarily popular among investors looking for a stable source of income. After all, they are backed “by the full faith and credit” of the US Treasury. 

The government of the United States has never defaulted on a debt. Thus, although treasuries do not pay the highest yield, they are still worth considering. If you are a risk-averse investor, adding them to your portfolio is a no-brainer.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.