For years, the bond market has sent one clear message to investors: To earn a decent yield, you have to take risks. But after a long stretch of painfully low interest rates, one of the least risky investments around is finally offering respectable yields.
As the Federal Reserve raises rates, short-term U.S. Treasury yields have climbed sharply. As of mid July, the two-year Treasury yields 2.6%, up from 0.7% three years ago.
That makes short-term Treasuries look compelling for the first time since the financial crisis. Investors in these bonds can now keep pace with inflation and earn a yield that’s competitive with the highest-yielding certificates of deposit. Plus, short-term Treasuries come with very little interest-rate risk (when rates rise, bond prices fall) and are backed by the U.S. government.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Money managers are taking note. “The story of the year this year will be the front end of the yield curve moving higher and being an alternative to other investments,” says Rick Rieder, BlackRock’s chief investment officer of global fixed income. He points to five-year investment-grade bonds, which offer a yield of about 3.6%. “I’m getting virtually all of that yield just being in a front-end Treasury,” he says, and without having to worry about credit risk—the risk that the issuer will default on the debt.
That’s a drastic change from recent years, when income-seeking investors were forced to take on substantial interest-rate or credit risk—or both—to earn a healthy yield. The rise in short-term yields may also cause investors to rethink their stock exposure. The Utilities Select Sector SPDR exchange-traded fund, for example, yields 3.4%. You can get about three-fourths of that yield with less risk in a two-year Treasury.
Even if the Fed raises rates faster than expected, short-term Treasury investors are in little danger, Rieder says, because the generous yields on these bonds would cushion the blow. In longer-term Treasuries, however, “the interest-rate sensitivity is tremendous,” he says. The 30-year Treasury bond, for example, would suffer a 4% price decline if rates rise just 0.2 percentage point.
Treasuries Versus CDs
Top-yielding CDs still offer slightly more generous income than short-term Treasuries. But savers weighing short-term Treasuries against CDs should consider a few factors beyond yield. Unlike CDs, Treasuries are exempt from state and local income tax. So taxpayers in states with higher income tax rates may easily get higher after-tax yields in Treasuries.
Treasuries also offer convenience for yield hunters. If you’re trying to earn top yields in CDs, “you’re unlikely to get the best deal just sticking with one bank,” says Ken Tumin, editor of DepositAccounts.com. And Treasury investors with large balances don’t have to worry about going over the federal deposit insurance limits that apply to CDs and other bank deposits.
How short term should you keep your short-term Treasuries? The yield curve has been flattening, so the additional yield generated by investing in longer-term Treasuries is diminishing. As of mid July, a five-year Treasury yields 2.8%, and the 10- and 20-year both yield roughly 2.9%. That’s not much compensation for a lot of extra interest-rate risk. So a two-year yield of 2.6% “seems to be the sweet spot,” Tumin says.
Brokerage firms such as Fidelity and Schwab charge no commission for online purchases of Treasuries. Or you can buy directly from the federal government in increments of $100 at treasurydirect.gov.
Plan to hold your Treasuries to maturity. If you want to sell early, you’ll have to first transfer your Treasuries to a bank or broker.
Treasury bills (which have maturities up to one year) pay interest only at maturity, and Treasury notes (with maturities of two to 10 years) pay interest semiannually, so retirees seeking monthly income may want to stagger their purchases.
-
Here's How To Get Organized And Work For YourselfWhether you’re looking for a side gig or planning to start your own business, it has never been easier to strike out on your own. Here is our guide to navigating working for yourself.
-
How to Manage Risk With Diversification"Don't put all your eggs in one basket" means different things to different investors. Here's how to manage your risk with portfolio diversification.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are SayingFederal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
CPI Report Casts Doubt on Rate Cuts in 2025: What the Experts Are Saying About InflationCPI November Consumer Price Index data sealed the deal for a December rate cut, but the outlook for next year is less certain.
-
Rebound in Jobs Growth Keeps Fed on Track: What the Experts Are SayingJobs Report No nasty surprises in the November payrolls data leaves a quarter-point cut in play.
-
October CPI Report Hits the Mark: What the Experts Are Saying About Inflation
CPI While the current pace of rising prices appears to have leveled off, the expected path of rate cuts has become less certain.
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
Market Reaction to Election Results: What the Experts Are SayingJobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
-
Jobs Growth Stalls Amid Hurricanes and Strikes: What the Experts Are SayingJobs Report A dismal October payrolls print supports the case for a slow and steady pace of rate cuts.
