The financial crisis has shaken the stock market but that didn’t stop the Chinese government from running to treasury bonds. The country purchased $29.2 billion in treasury bonds last year, bringing its total U.S. debt holding to $681.9 billion. They’re not the only ones buying up U.S. debt, though. These days, desperate investors just a few years from retirement are also getting on the T-bond train, even though the returns are notoriously low.
"I’d liken the situation to people on the Titanic rushing to lifeboats," says T.J. Marta, senior currency strategist for RBC Capital Markets. "They’re not running for a bubble, they’re running like hell trying to escape."
What's a T-bill?
Treasury securities, or “treasuries” for short, are IOUs issued by the U.S. Department of the Treasury to provide money for roads, defense spending and, most recently, the $700 billion Troubled Asset Recovery Program. In other words, when you buy a treasury, you’re loaning the government money, in exchange for a very modest and very safe rate of return.
Generally, there are four kinds of treasuries: treasury bills, which have maturity dates of one year or less; treasury notes, which mature in two years; treasury bonds, which take up to 30 years to fully mature and TIPS, or Treasury Inflation-Protected Securities in which the principle is adjusted for inflation.
Though many investors sell the bonds on the secondary market, the interest rate is set at auction, meaning that the bidders ultimately decide what the fixed interest rate on any treasury security is going to be from the date of issue until it matures.
You can find a schedule of auctions at TreasuryDirect, a website run by the US Bureau of Public Debt. Although these auctions are open only to investors who can afford to pay billions for U.S. debt, ordinary people can also purchase treasuries either through their broker or through TreasuryDirect.
Security vs. Growth
Investors looking for a hefty payout won’t find them in treasuries. The yield on a two-year bond is less than 1%, and a 30-year bond will only yield 3.15% on your initial investment.
Treasuries can pay off for top-tier investors looking to diversify their investment portfolios. However, if you’re at the lower end of the wealth spectrum, keep in mind that the annual percentage interest on an FDIC-insured savings account can be more than 2% of the principle and CDs can yield as much as 4%.
"If you’ve got $10 million and you just want to protect your principle, investing in treasuries may not be such a bad idea," Karl Blovet, a Chicago-based financial planner. "Treasuries are paying next to nothing right now, so all you’ll be able to do is protect your principle."
