Lately, I find myself increasingly drawn to investing in Treasury bonds. With yields ranging from 5% for 3-month to 1-year bonds, it’s hard to ignore the allure of these guaranteed returns.
However, as I continue to purchase Treasury bonds, doubts begin to creep in. Will I regret this decision a year from now? Maybe you’ve started to ponder the same thing.
Reflecting on the 2008 financial crisis, I recall investing in 5-year CDs that yielded 4.25%. At that moment, those rates seemed remarkable, especially considering the state of the stock market. Yet, in hindsight, the S&P 500 would have been a wiser choice.
My instincts tell me that I won’t regret investing in Treasury bonds today. But let’s explore the reasons why.
Having spent 27 years in investing, with 13 years in finance, and retiring in 2012, I’ve amassed considerable experience. Since founding Financial Samurai in 2009, I’ve penned over 2,500 articles. Here’s what I think about buying Treasury bonds today.
The Potential Pitfalls of Investing in Treasury Bonds
First, let’s look at the disadvantages of Treasury bonds with a 5%+ guaranteed return.
1) Liquidity Concerns
To enjoy the guaranteed return, you must hold Treasury bonds until maturity. Selling before this may result in a discount, translating into higher costs for your desired purchase.
2) Opportunity Costs
The funds used to buy Treasury bonds might have found more lucrative opportunities elsewhere. Though 5% seems appealing, it falls short of the S&P 500’s average annual return. Opportunities in stocks, real estate, venture capital, or even your business might yield higher returns. Buying Treasury bonds might be regretful if you overlook these chances, even with the attractive current yields.
3) Tax Implications
Investing in Treasury bonds means paying federal income tax on the income, as per the 1099-INT form from the Department of Treasury. Though state or local taxes don’t apply, profits from selling at a premium will be taxable as capital gains.
Why I’m Content Investing in 5%+ Treasury Bonds
Despite the possible downsides, here’s why I feel good about accumulating Treasury bonds:
1) Higher Than Safe Withdrawal Rate
Currently, our safe withdrawal rate is 0%, as we rely entirely on online income. Any return above 3%–4% after taxes ensures additional living expenses for a year.
2) No Immediate Major Expenses
With no plans for buying a new house, car, or any other significant investment, the focus shifts to managing existing assets and covering living expenses.
3) Satisfaction with Current Lifestyle
We’re content with what we have and don’t crave extravagant vacations or luxury items.
4) Covering Most Mortgage Costs
Most existing mortgages have rates below 5%, so a 5% return covers our 2.125% mortgage and more. This concept makes homeownership seem highly economical.
5) Cautious Approach to Investing
I’ve entered a decumulation phase in my life, aiming to avoid unnecessary risks. A 5% risk-free return feels like a blessing, especially after years of earning much less.
6) Less Stress Since 2020
Reducing investment stress is a priority for me after navigating the challenges of the pandemic years.
7) The Transience of 5% Treasury Bond Yields
These high yields may not last, and locking in at the peak seems like a strategic move.
8) Managing Excess Cash
Investing excess cash in short-duration Treasury bonds alleviates discomfort while earning a return.
9) Competitive Performance
Treasury bonds could outperform riskier assets like stocks and real estate in the next year, making them an attractive option.
Conclusion: Peace of Mind with Treasury Bonds
Investing in Treasury bonds offers a level of tranquillity, especially when considering how $20 million at a 5% return would generate $1 million guaranteed.
If I saw greater upsides in other investment avenues like the S&P 500 or real estate, I might reconsider. But for now, the uncertainty and potential downturn in these markets make a 5% return on Treasury bonds seem wise.
In the meantime, most of my liquidity is funneled towards Treasury bonds, and I’m responding to capital calls for various private investments. These decisions align with my broader investment strategy and financial goals. I believe the safety and predictability of Treasury bonds offer a stable and satisfying path for many investors.