Want an investment that offers more safety than betting on the San Francisco 49ers in the Super Bowl?
Buy a U.S. Treasury. Treasuries are backed by the full faith of Uncle Sam, come in denominations as small as $1,000 and are paying interest rates that generally beat those on certificates of deposit. Treasury rates now range from about 5.5 percent to about 7.5 percent.
“When investors see marketable Treasury securities with attractive yields relative to other investments, we see more interest in them,” said Pete Hollenbach, spokesman for the federal Bureau of Public Debt. “There has been a good amount of information made to the public about how easy it is to do it.”
That’s why more people are snapping up Treasuries. They are discovering that Treasuries are not just for tycoons cutting deals over a power lunch.
Even the smallest investor can buy Treasuries for free without ever leaving home. (Those who want the convenience of being able to sell quickly can pay a broker or banker a fee to buy Treasuries for a fee of about $50.)
And, Treasuries are a bargain. Last year, the Federal Reserve clobbered bonds by raising interest rates a half-dozen times. Billions poured out of bond funds because of a basic-but often misunderstood-principle: When interest rates rise, the value of bonds falls.
That is one reason holdings of individuals who bought Treasuries directly from the government grew to about $80 billion in January, up from $61 billion in January 1994.
The difference between inflation and interest rates has also made Treasuries attractive. For example, the difference between a Treasury paying 7 percent and last year’s inflation rate of 2.7 percent is a return of 4.3 percent.
That is historically high, said George Pierce, a certified financial planner in Lexington, Ky.
If you want a guaranteed return and think that most, if not all, of the interest rate increases are over for now and inflation will stay under control, Treasuries are a good bet. Many analysts predict inflation will rise no higher than 4 percent this year.
Another plus: There is no state or local income tax owed on Treasuries. For a Treasury yielding 7 percent, that would be the equivalent of a taxable investment that paid about half a percentage point more.
Some analysts predict the average stock will be lucky to return 8 to 10 percent a year. In comparison, Treasuries do not look bad. Many mutual funds actually lost money last year.
The Treasury issues three types of securities: bills, notes and bonds. The difference is the length of time they take to mature.
Interest payments are higher for longer maturities, but the risk for long-term Treasuries is greater because of the possibility of wider interest rate swings over time.
“Because of the interest rate risk, individual investors should approach Treasury bonds with maturities greater than perhaps 10 years with caution,” advises a recent article from the American Association of Individual Investors.
Treasury bills carry a term of a year or less; notes mature in 2 to 10 years; bonds come in 30-year maturities.
The interest earned on notes and bonds is automatically credited to an individual’s bank account every six months.
Bills work a little differently. Those are sold at less than face value. The holder receives the full bill amount upon maturity.
Buying on your own through the government’s Treasury Direct program is free right now. That has one big advantage: It enables a buyer to avoid a bank or brokerage fee.
Buying through Treasury Direct is simple. Just call 312-322-5369 at the Federal Reserve Bank in Chicago and ask for a tender-a one-page bid form.
(You also can write to the Bureau of the Public Debt, Division of Customer Services, 300 13th St., S.W., Washington, D.C. 20239-0001. Ask for the free pamphlet called “Buying Treasury Securities.”)
The bid form asks whether you want to submit a competitive or non-competitive tender. Check the box marked “non-competitive” to ensure you get the average interest rate accepted at the auction, according to “Investing on Your Own” from Consumer Reports Books.
Those who select a competitive bid must specify the exact rate they are willing to accept. A competitive bid might be rejected if it is set too high.
For T-bills, the minimum initial order is $10,000; additional purchases can be in $1,000 increments.
The minimum required for a first purchase on two- or three-year notes is $5,000; extra transactions can be made in $1,000 multiples.
Longer-term bonds and notes can be bought in $1,000 increments at any time.
A purchase direct from the government can be mailed, or you can show up in person the day of the auction at the nearest Federal Reserve Bank. A mail order must be postmarked by the day before the auction.
After the Treasury is bought, the government sends a confirmation and the interest rate. The sale is recorded on Treasury Department computers. No certificate is issued.
There is one main disadvantage to buying direct: It is only suitable for people who want to buy and hold Treasuries to maturity.
“Even though it is possible to sell Treasury Direct securities (yourself) before they mature, the process is cumbersome and time-consuming, and by the time you’re done it may no longer be an opportune time to sell in the bond market,” according to “Investing on Your Own.”
Many people do not want the hassle of dealing direct. By paying their broker or banker a fee, they get one huge advantage: They can sell quickly before maturity with a telephone call.
For investors who decide to invest heavily in Treasuries, experts suggest a strategy called laddering.
Simply put, laddering is buying bonds, certificates of deposit or other fixed-income investments at varying maturities.
For example, someone would be laddering by buying Treasuries that matured in one year, two years and three years. That spreads out the risk.
