Treasury Bonds: Are They a Good Retirement Investment?

Retirement Financial Planning Concept.
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The volatility in the stock market is unnerving for any investor, but retirees have a specific concern: a sharp drop in their portfolios can be devastating, as they don’t have the time to wait for the market to recover. Plus, they are withdrawing money to live on during their retirement, and selling stocks when the market is down is the exact opposite of the investing truism “buy low, sell high.”

Some investors, no matter what their age, have a great fear of losing money in the market. They just can’t stand to see the value of their portfolio decline. They seek out investments that are very low risk.

Treasury bonds can be a good investment for either of these types of investors and can be a solid choice for part of your retirement plan, no matter how old you are. Here is what you need to know to learn if they are right for you.

How Does a Treasury Bond Work?

Treasury bonds, sometimes called T-bonds, are debt instruments issued by the United States government. When you buy a Treasury bond, you are essentially lending the government money. In return, the government agrees to pay you interest twice a year for the life of the bond. Once the bond matures, the government will pay your back the money you loaned it.

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When you buy a Treasury bond, you will know how long you will need to hold the bond — T-bonds are issued in terms of 20 or 30 years — and what the interest rate is.

Treasury bonds are offered in multiples of $100. This is the bond’s face value. If you wanted to invest $1,000 in Treasury bonds, you would buy 10 bonds. The price of bonds is determined at auction and may be greater than, equal to or less than the face value, sometimes called “par.”

The interest rate is also determined at auction since it is a function of the bond’s price. Each bond has a coupon rate, which is the rate of interest it is expected to pay. In some circumstances, investors will bid up the interest rate because they want that particular bond. In this case, the bond would be sold at less than par, resulting in a greater return for the investor than the coupon rate would indicate. The interest rate the bond actually pays is referred to as “yield to maturity.”

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Here’s an example. Suppose a 30-year bond has a coupon rate of 4.25%. Investors think this bond is actually worth 4.35% — this is its yield to maturity. In order for the investor to make 4.35% on the bond, they have to buy it for less than par value.

So, a $100 Treasury bond would be sold for $98.33 instead of $100. The investor earns $4.25 in interest each year, payable in two payments of $2.12 each, every six months.

In 30 years, the bond matures, and the investor gets back $100 — not the $98.33 they paid. The difference between the price of $98.33 and the par value of $100 is what represents the additional 0.10% in the interest rate.

Conversely, if investors think this bond should only be paying 3.99% YTM, they will pay more than par when they buy the bond. Instead of $100, the investor would pay $104.51. The investor will still get $4.25 in interest each year — two payments of $2.12 each, every six months. In 30 years, the bond matures, and the investor gets back $100 — not the $104.51 they paid. The difference represents the reduction of 0.26% in the interest rate.

How Often Are Treasury Bonds Issued?

Treasury bonds are originally issued four times per year — in February, May, August and November. Scheduled reopenings, when additional amounts of previously issued bonds are sold, occur in January, March, April, June, July, September, October and December. Reopenings have the same interest rate and maturity date as the original issue but may — and usually do — have a different purchase price.

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You can also make a competitive bid for Treasury bonds, specifying the interest rate you want to get. Your bid may or may not be accepted or may be accepted for only part of the number of bonds you specify. To place a competitive bid, you must do so at a bank or a broker.

What Are Treasury Bonds Paying Now?

The interest rates on Treasury Bonds rise and fall along with the Fed funds rate — although they may not operate exactly in tandem. 30-year Treasury bonds issued on June 15, 2022 have a coupon rate of 2.87%. The high yield, or auction rate, is 3.18%, so these bonds will sell at a discount to par. 20-year Treasury bills issued on May 31, 2022 have a coupon rate of $2.50% and a high yield of 3.29%, so these bonds will also sell at a discount to par.

Can You Make Money on Treasury Bonds?

Treasury bonds earn a fixed rate of interest. The interest rate is set when the bonds are issued, and it is expressed as an annual rate and paid in two semi-annual payments. So, if you purchase a 30-year Treasury bond with an interest rate of 5.00%, you will receive 60 payments of $2.50 each, for a total of $150, over the life of the bond.

If you purchased the bond at a discount — that is, for less than the $100 face value — you will get $100 back when the bond matures. So, the difference between what you paid, and the par value is another way bond investors make money when bonds are purchased at a discount.

How Can I Buy Treasury Bonds?

You can buy Treasury bonds online at TreasuryDirect.gov, or from a bank or a licensed broker. If you purchase bonds through TreasuryDirect.gov, you agree to accept the interest rate that is set at auction. You cannot enter a competitive bid on the website.

Can I Cash in a Treasury Bond Early?

20 or 30 years is a long time to hold a single investment. For this reason, many investors seek to sell their Treasury bonds before they mature, so there is an active secondary market for Treasury bonds. Like other investments, they are only worth what someone is willing to pay for them, so you will need to determine if selling is a good idea at the particular time you’re looking to do so. Just like buying bonds, you can sell them through a bank, broker or at TreasuryDirect.gov.

Are Treasury Bonds a Good Investment?

Because they are backed by the full faith and credit of the United State Government, Treasury bonds are one of the safest investments you can buy. Because there is so little risk that you will lose money, they don’t usually pay a very high return.

So if you’re young, not afraid of risk and investing for your retirement in 40 or 50 years, Treasury bonds should probably be a very small part of your portfolio, if any. But if you’re looking retirement in the face or can’t sleep at night because you’re worried about losing money in the stock market, Treasury bonds could be a very good choice for you. For most investors, Treasury bonds can make up a part of their portfolio, but how much will depend on your particular situation.

Information is accurate as of June 13, 2022.

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About the Author

Karen Doyle is a personal finance writer with over 20 years’ experience writing about investments, money management and financial planning. Her work has appeared on numerous news and finance websites including GOBankingRates, Yahoo! Finance, MSN, USA Today, CNBC, Equifax.com, and more.
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