up on trying to time either the capital or stock markets.”
As Uncle Sam’s IOUs, Treasuries are simply the Fort Knox of investing. The reason: the U.S. government has never defaulted on its debt. It’s little wonder, then, that the world flocks to Treasuries at the sign of the slightest bit of unrest.
Treasuries work just like any other bond. In this case, you’re lending money to the federal government. In return, you get a set rate of interest and a promise from Washington that you’ll receive the face amount of the bond upon maturity. To top it off, you pay no state or local tax on interest income.
Treasuries come in a variety of maturities, each with its own name. There are Treasury bills-commonly known as T-bills-which are issued for a year or less; Treasury notes, which mature in two to 10 years; and, finally, Treasury bonds, which stretch out 10 years or longer. Another difference: each maturity pays a different amount of interest. Generally, though, you can expect bonds with shorter maturities to pay less interest than long-term vehicles. It takes a greater amount of interest to convince investors to tie up their money for longer periods of time. Weighing the risk and reward of different interest rates corresponds to liquidity-how quickly you need to get to your money at any point in time. At press time, the 30-year Treasury bond paid 5.29%, while the two-year Treasury note anted up 4.65%.
If you have a chunk of money earmarked for a specific goal and want to safeguard it from hiccups in the market, we recommend you invest in Treasuries. If you have $5,000 that you want to put toward a new home three years from now, money managers suggest that you purchase the five-year Treasury, which pays 4.56%. With investors trying to figure out the future direction of the global economy, it’s a good idea to stick with notes with maturities of less th
an five years, advises Rodgers. By doing so, you will have money available when you’re ready to cash out.
Buy Treasuries directly from Uncle Sam. Under its Treasury Direct program, you can open an account with the government and build a portfolio without paying brokerage fees. For details, phone the local branch of the Federal Reserve bank or 800-943-6864.
Another option: consider government bond mutual funds. Bond funds, like stock mutual funds, offer a portfolio of issues under the supervision of a money manager. And, unlike the average individual investor, funds can tap into government agency debt, which is as safe and sure as treasuries, yet pays a bit more yield.
To give you a few choices to mull over, we had Morningstar screen funds with an average maturity of four years or less (see charts). We then ranked the funds according to three-year average annual total return. The winner: Dupree Intermediate Government Bond Fund (800-866-0614), which averaged a return of 7.58%. The three-year average annual return for government bond funds as a group was 8%.
Munis, like Treasuries, represent debt obligations.