Welcome Back

The US Treasury has announced that it will once again issue 30-year bonds. Dropping them in 2001 was probably a mistake, since it was based on the premise that the US would be running budget surpluses indefinitely. This improves Treasury’s ability to tailor its offerings to the shape of the yield curve.

And once again, this provides me a chance to shill for one of the most under-utilized tools available to the individual investor: buying Treasury bills, notes, and bonds under the Treasury Direct program. Under this program, you buy Treasury debt for $1,000 minimum, in increments of $1,000. Redemptions and interest payments are done through electronic funds transfer to your checking account. You get the same price as the big boys, and there are no commissions or fees.

Here’s a suggestion: subscribe to Treasury Direct, and buy equal amounts of 1-year, 3-year, and 5-year notes. Next year, when your 1-year note matures, buy 1-year, 3-year, and 5-year notes again. At that point, you own debt securities maturing in 1, 2, 3, 4, and 5 years and have constructed a bond ladder. This is a great strategy for your fixed income investments, since it minimizes your risk of interest rate changes. All you need to do is keep reinvesting the maturing notes in new 5-year notes. Your total investment could have been as low as $3,000 the first year and $2,000 the second.

Update: My face is red. Treasury doesn’t offer a 1-yr. note, as Uncle Jack points out in the comments. Substitute two consecutive 26-week T-bills and it works. Thanks, Uncle Jack!

5 thoughts on “Welcome Back”

  1. That’s not bad, but also not possible as there is no 1-year issuance through Treasury Direct. To modify your post slightly, the investor would buy the 2yr and 5yr at first. Then next year buy the 2, 3 and 5 year. That would give your scenario of having one coming due every year to be replaced by a new 5 year.

    Overall, a very good suggestion on your part.

    Uncle Jack

  2. I don’t see why this is worth the hassle for the small investor vs. a no fee/low expense all-Treasury bills money market fund from Vanguard?

  3. It only seems like a hassle until you realize the actual cost of convenience.

    Buying any bond fund subjects you to falling bond prices as rates rise. I looked at their short-term treasury fund (VFISX), and while the yield is a respectable 2.85% *, your overall return goes down as rates rise, hence the ytd return of 0.66% *. Oh, and their low expenses? 0.24% doesn’t sound like much but it’s still sacrificed money when you could build this ladder that Mitch posted with minimal hassle, and NO fee.

    All data gathered from Morningstar.com

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