Why Treasury bonds could be beneficial in the current climate.
Puzzled by the Treasury bond market? You’re not alone. While considerations around buying and selling stocks and mutual funds are relatively easy to understand – buy low, sell high, avoid high-fee funds – Treasury bond purchase considerations are not quite as straightforward. For example, as bond prices go up, yields go down. Wait, what?
But an explanation of these concepts can help you confidently wade into Treasury bond trading and take advantage of the still favorable bond market in 2024.
What is a Treasury bond?
U.S. Treasury bonds are debt issued by the U.S. Treasury Department and backed by the U.S. government. The purchaser of a bond in effect loans the government money, and the government pays a fixed interest rate to the bond holder until maturity, when the government pays the full face value of the bond.
The bond market is segmented based on bond type and maturity. Treasury bills have maturities up to one year. Because they’re a short-term investment, they don’t pay interest. Instead, they’re issued at a discount to their face value, and when they mature, holders are paid face value. In contrast to Treasury bills, Treasury notes and Treasury bonds pay interest, which is referred to as a coupon payment. Treasury notes are short- to mid-term securities with maturities ranging from 1 year to 10 years, while treasury bonds mature in either 20 or 30 years.
Why is the 10-year T-note an economic bellwether?
The 10-year Treasury note serves as an important indicator that helps us understand what’s happening in the financial world. It provides a signal of the market’s expectations for inflation and the overall economic health. And it acts as a benchmark for setting interest rates on a wide range of financial products, from mortgages to corporate debt. It also has global significance as it’s the most widely used interest rate benchmark for pricing all risk assets worldwide. When you see the 10-year Treasury yield go up or down it’s a reflection of how investors are feeling about the economy and where they think it’s headed. Declines in yields generally indicate an economic slowdown or lower inflation. While gains signal higher growth or inflation.
However, rising yields might also result during high inflation when investors won’t buy bonds unless their price falls to offset the inflation. Thus, high yields don’t always indicate desirable economic circumstances.
Investors compare the return on a 10-year Treasury note to other debt instruments. If the yields are high relative to these other instruments, investors tend to favor Treasuries. As a result, the other debt instruments must increase their interest rates to attract investors.
Therefore, when the yields for 10-year Treasuries rise, the rates for mortgages and car loans can also increase, directionally tracking the movement in 10-year Treasuries. Similarly, when yields fall, the rates for mortgages and car loans can also decrease. This relationship illustrates how the 10-year Treasury note yield serves as a benchmark in the financial market.
10-year Treasury yields remain an attractive opportunity
The 10-year Treasury yields peaked in the third quarter of 2023 but remain high. At the same time, as the market anticipates interest rate cuts, 10-year Treasury yields may begin to fall. What does all this mean for investors curious about buying Treasury bonds with fixed rates and predictable returns? Now might be a good time to consider buying a 10-year Treasury for two reasons.
First, treasury bond yields are still relatively high compared to what they have been in the past decade.
Second, the starting level of bond yields is the single best predictor of a bond’s total return over longer periods of time. Considering these two factors together, the relatively high yields available in 2024 mean that Treasury bonds are worth a close look.
Treasuries are a strong fixed-income investment for those who prefer low-risk options that have a predictable return stream. While high-interest savings accounts are presently offering similar yields, the interest rates you earn from these savings accounts will fall if the Federal Reserve cuts interest rates. In contrast, Treasury bonds purchased now will maintain the same rate of interest even if the Fed lowers rates.
Of course, how much an individual should invest in bonds depends upon several factors, including their goals, retirement status, and risk appetite. Investors should speak with their financial advisor to carefully assess market dynamics and consider whether Treasury bonds generally make sense and what mix of durations would best align with their investment aims.
Whatever you decide, if you talk to your advisor, you won’t get lost in the intricacies and counterintuitive qualities of bond investing.
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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing materials are accurate or complete. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Gainspoletti Financial Services and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Raymond James and its advisors do not offer tax or legal advice. You should discuss these matters with the appropriate professional.
*Material prepared by Raymond James for use by its advisors.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.
U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting intermediate-term (2 – 10 years) obligations of the U.S. government.