Case for Investing in U.S. Treasuries
This article presents the main reasons why I invest in U.S. Treasuries. To be more clear, U.S. Treasuries are
- Treasury Bills
- Treasury Notes
- Treasury Bonds
- FRNs (floating rate notes)
- EE savings bonds
- I savings bonds
Here are a few reasons why I invest in U.S. Treasuries.
Most Successful CompanyThe U.S. federal government can arguably be thought of as the most successful company in the world. They regulate/control all companies in the U.S. and have global influence. They make the laws all other companies must abide by. They make the currency. I don't even think of Treasuries as Treasuries anymore, I think of Treasuries as stocks in the most successful company ever.
Mathematical ReasonsWith Treasuries, actually with bonds in general, you know precisely how much you'll receive and when from interest payments and returned principal. You can mark them on a calendar. You can write out a mathematical equation. Interest payments are legally obligated to be paid. This all makes it very easy to use to plan, to match your payments with your expected bills, and has the added benefit of helping to combat speculation. Think of the word "savings bond". Both "savings" and "bond" imply it is for the long term, not short term trading and speculation.
Minimizing FeesThere isn't any explicit advertising and marketing with U.S. Treasuries. No sales pitches, commissions, churn, etc. You won't get a sales pitch by someone trying to make money off of you which is something that literally plagues stocks, precious metals, Forex, and other areas of investing. There are no fees to buy Treasuries from http://www.treasurydirect.gov.
Tax TreatmentNo state and local taxes are paid with these, just federal. Put another way, your taxable equivalent APY or effective apy, EAPY = APY/(1-state tax rate), thus giving your rates a boost.
QuacksAnti-gov quacks and goldbugs are against Treasuries. These silly types are always wrong. I've been reading about 'the next big crash to take out humanity' every year since before Y2K. You just got to laugh and collect your interest payments.
Inflation AdjustmentsTIPS and I savings bonds have explicit, however imperfect, inflation adjustments built in. FRNs have their rates updated regularly as well.
RatesPeople tend to freak out with "rising rates" and that this is bad for Treasuries. This is because they are stuck in the "mark to market" paradigm, in which they have to see the value of their Treasuries everyday. This is also because they know that as rates go up, the value of the bond goes down. This is mathematically true, but trivial, as it ignores that this is an unrealized loss (ie. it is only a loss if you have to sell), and ignores things like you're reinvesting interest payments and matured principal along the way, thus there is growth from these rates. It also ignores that if rates are rising and you buy a new Treasury then that Treasury is paying you more income.
Also, people might freak out that something like the EE savings bond rate is currently low. But if they read the literature, the effective rate is about 3.53% at this point in time since the Treasury guarantees the value of the savings bond to double after 20 years. In other words, solve (1+r)20 = 2 for r. Of the stocks that even offer dividends at this point in time, only 36% of them (1,176/3,268) offer a dividend greater than 3.53%. You can have a high dividend rate with a stock, then have it be cut, taken away entirely, company go bankrupt, still get paid but have your principal drastically reduced, and so on. The rate on a Treasury is guaranteed. Interest rates and dividend rates are apples and oranges comparisons. Interest rates are a higher quality more reliable way to be paid.
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