Treasury bonds: Still safe for investors

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Edward Jones - Chad Choate, AAMS

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Jan 25, 2024

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Florida - Sarasota, Bradenton & Charlotte Counties

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You may have read reports about an impending “debt crisis” in the U.S. Should you be worried about investing in Treasury securities?

Part of the concern over debt has been driven by the cost of government borrowing, which has risen because of higher interest rates. But it’s worth noting that while interest expenses have risen to nearly 2% of gross domestic product (GDP), this measure had exceeded 3% in the early 1990s. So, while the upward trend of federal debt could prove problematic down the road, the claims of a current crisis may be overblown. And Treasury securities are still considered among the safest investments in the world, as they are secured by the full faith and credit — that is, the ability to borrow and tax — of the United States.

In any case, if you haven’t invested in Treasury securities, you’ll want to know the basics. First of all, when you purchase a Treasury security, you’re lending money to the federal government for a specific period of time.

Here are your purchase options:

 Treasury bill – Typically matures in four, 13 or 26 weeks, although some have maturities of up to a year.

Treasury note Matures between one and 10 years.

Treasury bond – Typically matures in 10 to 30 years.

When you buy Treasury notes or bonds, you receive semiannual interest payments, but when you purchase a Treasury bill — a T-bill — you generally buy it a discount, and when the bill matures, you receive its face value. So, for instance, you might pay $4,700 for a 13-week T-bill and get $5,000 back at the end of the three months.

When investing in Treasury securities, you’ll want to keep these features in mind:

Price fluctuation – While your interest payments will always remain the same, the market value of your Treasury security can change. So, you might not get face value for a Treasury bond if you sell it before it matures, particularly if market interest rates are higher than the rate you’ve been receiving. Because longer-term bonds have more payments left to make than shorter-term ones, they are more sensitive to interest rate changes and market price fluctuations.

Taxes – Interest income from Treasury securities is subject to federal income tax but exempt from state and local taxes.

In addition to the traditional Treasury bonds, bills and notes, another option is available: Treasury Inflation-Protected Securities (TIPS). Unlike other Treasury securities, in which the principal is fixed, the principal of a TIPS can move up or down, based on movements in the Consumer Price Index for Urban Consumers (CPI-U). Once your TIPS matures, if the principal is higher than the original amount, you’ll get the increased amount; if the principal is equal to or less than the original amount, you’ll get the original amount. TIPS pay a fixed interest rate semiannually until maturity, but because interest is paid on the adjusted principal, the amount of your interest payments can vary. As with other Treasury securities, you can hold a TIPS until maturity or sell it before it matures.

Don’t let scary or gloomy predictions discourage you from considering Treasuries — they remain a good option as part of the fixed-income portion of your investment portfolio.

 

Chad Choate III, AAMS

828 3rd Avenue West

Bradenton, FL  34205

941-462-2445

chad.chaote@edwardjones.com 

 

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. 

Edward Jones, Member SIPC

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Financial Advisor 828 3rd Ave. W., Bradenton, Florida, 34205

Hello, I'm Chad Choate a dedicated financial advisor in Bradenton, FL, I began my career with Edward Jones in 2017. As a financial advisor, I want to find out what's important to you and help you build personalized strategies to achieve your goals. As a lifelong Manatee County resident, I graduated from the University of South Florida and was a teacher in Manatee County before joining Edward Jones. My driving force is to change people's lives in a positive way, and what better place than my home to do that. Whether you're planning for retirement, saving for college for children or grandchildren or just trying to protect the financial future of the ones you care for the most, we can work together to develop specific strategies to help you achieve your goals. We will also monitor your progress to help make sure you stay on track or determine if any adjustments need to be made. Throughout it all, we're dedicated to providing you with top-notch client service. But we're not alone. Thousands of people and advanced technology support from our office can help ensure you receive the most current and comprehensive guidance. In addition, we welcome the opportunity to work with your attorney, accountant and other trusted professionals to deliver a comprehensive strategy that leverages everyone's expertise. Working together, we can help you develop a complete, tailored strategy to help you achieve your financial goals. I currently volunteer with the Manatee Hurricane football Broadcast and Booster Club, serve on my church's trustees council and have previously served as a leader in Young Life. I am a member of the Manatee Chamber of Commerce and an alumnus of their Leadership Manatee program. I have been married to my childhood sweetheart, Ashley, for 15 years and we have a son, Wesley, and daughter, Camryn. We enjoy watching our children play their sports and traveling as a family.