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If you’re looking for a relatively safe place for your cash, treasury bills have recently become more attractive, experts say.
Supported by the US government, goods of treasureor treasury bills, have terms ranging from four weeks to 52 weeks, and investors receive interest when the asset matures.
Over the past year, Treasury bond yields have surged following a series of interest rate hikes of the Federal Reserve – with the possibility of more soon. Treasury yields have been low since the Great Recession, with the exception of 2018.
“I think people are shocked that the returns are so high,” said certified financial planner Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan.
Currently, short-term Treasury yields are higher than long-term yields, known as an inverted yield curve. “That means the market expects rates to come down in time,” Watson explained.
Yet Treasury bond yields are competitive with other options for moneysuch as high yield savings accounts, certificates of deposit or Series I Bonds, he said. Of course, the best choice depends on your goals and timeline.
How interest rates affect the value of bonds
Another factor to consider is the current economic environment, including future Fed moves.
This is because of the inverse relationship between interest rates and the value of bonds. As market interest rates rise, bond prices generally fall, and vice versa.
Duration, another key concept, measures a bond’s sensitivity to changes in interest rates. Although it is expressed in years, it is different from the maturity of the bond since it takes into account the coupon, the term to maturity and the yield paid throughout the term.
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Generally, the longer a bond’s duration, the more likely its price will fall when interest rates rise.
But when interest rates fall, Treasuries won’t participate in that increase in market value, Watson said. “They will start to underperform higher quality corporate bonds once recession fears start to fade,” he said.
How to Choose the Right Term for Treasury Bills
While it’s possible to sell treasury bills before maturity, it can be difficult to choose the best term based on the current and future economic climate, experts say.
“It’s still the Fed, the Fed controls short-term interest rates,” said David Enna, founder of Tipswatch.coma website that follows Inflation-protected Treasury securities and other assets.
He said 26-week Treasury yields appear to reflect that investors expect continued rate hikes until this point. But terms beyond 26 years, such as 1-year Treasury bills, are “still quite attractive”.
However, the Looming US debt crisis may also affect investors’ willingness to buy Treasury bills maturing around the deadline, Enna said.
“It seems like a very small risk, but people will be aware of it as summer approaches,” he said.