To beginning investors, it may seem that there are neat cycles in which all interest rates rise and fall in unison. The truth is more chaotic than that, but that disorderliness can create opportunities.
When you think about whether interest rates are rising or falling, it is important to specify which interest rates you mean. For example, credit cards were barely affected by the huge drop in rates from 2008 to this year, while savings account rates dropped to nearly zero and mortgage rates reached record lows. More recently, while mortgage rates have been rising in recent months, savings and money market account rates haven't budged.
Even among similar types of rates, movements come at different times and to different degrees depending on the length of the instrument. Thirty-year mortgage rates move differently from 15-year mortgage rates. Five-year CD rates move differently from one-year rates. Treasury securities offer a range of time periods from one month to 30 years, and recent differences in movements across the Treasury yield curve are worth a closer look by investors who seek income-oriented investments.
A new twist in Treasuries
In early May, 30-year Treasuries were yielding 2.87 percent, compared to 0.11 percent for one-year Treasuries, and 0.03 percent for one-month Treasuries. That gave 30-year Treasuries a 2.76 percent advantage over their one-year counterparts, and a 2.84 percent advantage over the one-month alternative.How have things changed since then? It depends where you look. Short-term yields have fallen slightly, while the long-term yield has risen significantly. By the end of September, 30-year Treasuries were yielding 3.68 percent, while 1-year Treasuries were at 0.10 and 1-month Treasuries were at 0.02. That widened the advantage of 30-year Treasuries to 3.58 percent over one-year securities and 3.66 percent over one-month Treasuries. In a few short months, yields on Treasuries have started to look more attractive -- if you look at the long end of the yield curve.
What you should know about buying TreasuriesIf those Treasury yields look tempting, here are three things you should know about buying these securities.
- Income investors should take a buy-and-hold approach. Be advised that long-term Treasury prices can fluctuate wildly. However, if you are buying for income, you should be unaffected by those fluctuations as long as you take a buy-and-hold approach, in which case your income payments until maturity are guaranteed, and the face value of the security is guaranteed at that point as well.
- They are best bought in bulk. Treasury securities can be bought with reasonable efficiency in face-value blocks of $10,000 or more, so they are best for fairly significant commitments rather than smaller, incremental investments.
- Bond funds may not deliver enough income. A bond fund may allow for smaller investments, but be advised they may not deliver the same amount of income you think you are getting from the bond market. Mutual fund fees will take away a slice of that income, and whether you get the same yield as a buy-and-hold approach will depend on the bond manager's investment decisions.