Are Treasury Bonds a Good Investment?

Chris Maurer |

Managing your portfolio is a balancing act that takes careful investment planning. Whether you're preparing for retirement or building your wealth, the investments you make now directly affect the status of your portfolio years down the road. While they shouldn't make up your entire portfolio, treasury bonds can play an essential role in asset allocation. Learn more about investing in treasury bonds and how they can affect your ROI in the long run.

What are Treasury Bonds?

A type of U.S. Treasury security, treasury bonds are issued by the federal government. They're backed by the full faith and credit of the U.S. Department of the Treasury, meaning the US government is the one paying you back. A treasury bond is just one of the securities issued by the government. As outlined below, one of the biggest differences between government securities is the length of maturity:

 

Treasury Bonds

Treasury bonds offer the longest lifespan of government securities. Also known as T-bonds, they are issued anywhere from 20 to 30 years in length and pay interest every six months. 

Treasury Bills 

Also known as T-bills, this is a type of short-term security issued by the federal government. They typically mature anywhere from a few days to 52 weeks. While sold at a discount from their face value, returns are paid back at the full rate at the point of maturity.

Treasury Notes

These are intermediate-term debt securities issued by the federal government. T-notes are issued at several maturities, including two, three, five, seven, and 10 years, and interest payments are made every six months.

Treasury Inflation-Protected Securities

Treasury inflation-protected securities (TIPS) are issued with maturities of five, 10, and 30 years and hold a principal value that adjusts with inflation. TIPS pay interest every six months based on a fixed rate, but the payouts can vary based on the adjusted principal value.

 

When it comes to investing, it's usually true that the higher the risk of the investment, the higher the return will be. Treasury bonds are considered to be a low-risk investment, and thus deliver a lower overall payout. However, like several other government securities, they can offer a steady flow of income and provide an element of balance.

Advantages of Treasury Bonds

In terms of asset allocation (the percentage of each asset class in your portfolio) and diversification (the types of assets in your portfolio), investing in treasury bonds can be a prudent choice. The income generated can be used to balance out the stocks and other more volatile investment choices in your portfolio, helping you build it up steadily over time. Treasury securities can serve many purposes, including:

  • Minimizing the fluctuations in your overall portfolio value 
  • Compensating for the risk of loss from other investment options
  • Achieving a portfolio that's thoughtfully diversified

In terms of retirement planning, treasury bonds can benefit investors as they help build up that nest egg. While asset allocation within your portfolio may change depending on how close you are to retirement, treasury bonds offer a solid choice. What's more, they're easy to convert into cash. They can be sold before their maturity in a secondary bond market if needed. If you've already retired, they can also serve as an alternate income stream that can help fund your lifestyle.

Strengthen Your Portfolio's Potential 

Create a well-balanced portfolio that contains treasury bonds under the guidance of a professional. At Park Place Financial in Bellaire, Texas, we can help you find the investments that can best serve your needs. Receive a complimentary financial assessment from one of our financial planners. For more information, contact us today.