Individuals looking to build wealth are often told to invest, but determining the right investments can be difficult. For some, putting money into stocks comes with too much risk, which leads them to look for more conservative channels.
Suze Orman, the host of the “Women & Money” podcast, recently encouraged her listeners to invest in three Treasury bonds. In a September episode, she broke down how Treasury bonds work and how she would invest in them today.
What Are Treasury Bonds?
Treasury bonds are conservative options compared to investments like stocks, cryptocurrency, commodities and real estate. Treasury bonds are loans you give to the U.S. government for a fixed period of time. In return, you receive a fixed amount of interest every six months until the bond matures. Because the Department of the Treasury issues these bonds, many consider them to be safe investments with a minimal risk of default.
You can purchase Treasury bonds that last 20 or 30 years. For shorter terms, Treasury notes are available for intervals of two-, three-, five-, seven- and 10-year periods. Even narrower time frames are available for Treasury bills, which you can purchase for four, eight, 13, 17, 26 and 52 weeks.
Interest Rates and Treasury Bonds
Treasury bonds have an inverse relationship with interest rates, which is vital to understand before you invest. After you buy a bond at a fixed price, the government will continue to issue new bonds over your bond’s term. The rates of these new bonds will change depending on factors like government policies and economic conditions.
If the new bonds have higher interest rates, the investors who buy them will make more money than you. On the other hand, your Treasury bonds will become more valuable if the newer interest rates are lower than yours.
Orman explained that these rate changes affect bonds differently depending on their maturity. Interest rate changes can have a significant effect on long-term Treasury bonds — even a small shift means that your Treasury bond may generate more or less interest than the market rate for several years.
A short-term Treasury note will also become more or less valuable with a change in interest rates. However, it will mature more quickly, confining the gains or losses to a shorter time frame.
Orman’s 3 Recommendations
Orman reminded her listeners that a year ago, she recommended buying 30-year Treasury bonds. Those who followed her initial advice would be up considerably now. However, her advice has since changed with the market.
Now, Orman suggests investing in three different Treasuries, using a strategy called a Treasury ladder. A Treasury ladder involves buying multiple Treasury bonds, notes or bills with varied terms. This creates a spaced-out investment that protects you from risk. Orman specifically recommended buying three-, five- and seven-year Treasury notes.
Following Orman’s advice would stagger the maturity dates of your investments over several years, which would help reduce the risk stemming from interest rate fluctuations. When one note matures, you can reinvest that money into a new Treasury and lock in the new interest rate.
This may allow you to benefit from higher interest rates in the future instead of going all in on a long-term Treasury bond with a low rate.