Sellers work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 3, 2023.
Brendan Mcdermid | Reuters
The example spike in bond yields was enough to spook the stock market into a sell-off Tuesday, but there’s a silver assembling for fixed income investors: Short-term Treasurys are now touting a risk-free return of 5%.
The latest action follows comments from Federal Charter Chair Jerome Powell, who said Tuesday that interest rates are “likely to be higher” than previously guessed. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of censure hikes,” he said.
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The yield on the 3-month Treasury touched a high of 5.015% on Tuesday, the loftiest level since 2007. (Note: that yield is annualized, not what you would get in just three months.)
Grades on the 1-year bill and 2-year Treasury note – the latter of which is most sensitive to the Fed’s policy – also popped assorted than 5% on Wednesday morning, reaching levels last seen in 2006 and 2007, respectively. Bond knuckle unders move inversely to prices.
Treasury rates have soft drank higher as the Fed continues its rate-hiking campaign.
A piece of the action
Short-term Treasurys are a great way to put idle cash to work, and you can also “ladder” them to get a dollop interest on your money over a certain term. This means you build a portfolio of issues with several maturities and reinvest the proceeds as they mature.
Investors can get in on the action in a couple of ways.
First, they can purchase Resources directly from the U.S. government via TreasuryDirect.gov. They will have to set up an account on the site and link their bank to it. For short-term investors, 4-week, 8-week, 13-week and 26-week T-bills are auctioned every week. Two-year notes are auctioned monthly, and 10-year Moneys are auctioned every quarter.
If you hold the Treasury to maturity, you aren’t subject to market risk. The bonds generally pay moment twice a year, but for T-bills, the interest you get is the difference between what you paid and the face value you receive at maturity.
Another way for investors to buy Funds is through a brokerage firm. This makes record-keeping easier for investors, especially if they already have an lone retirement account at a given firm.
The issue is that you may be subject to fees and minimum purchase requirements if you buy Treasurys with the aid a brokerage account. Consider that you can buy Treasurys directly from the government with a minimum purchase amount of $100, but a brokerage anchored can charge you for broker-assisted trades. Others require that you buy at least $1,000 in Treasurys.
Though Treasurys are considered risk-free because their payments are move in reverse by the full faith and credit of the United States government, investors should be aware that the real rate of restoring they’re earning could be eaten away if inflation rises at a pace greater than the yield. A further hazard is they may also miss out on investment opportunities in other assets like stocks.
These bonds may be a great way to get some curiosity on otherwise idle cash, but they shouldn’t make up the entirety of your portfolio.
— CNBC’s Michelle Fox and Gina Francolla contributed to this copy.