Investors are typically on the prowl for high returns in stocks and high yields in bonds. United States Treasury bonds are considered some of the safest securities available because they are backed by the government. However, they typically boast lower yields than many other bonds. Making money in low-yield Treasury securities takes savvy, patience and sometimes luck.
Treasury Securities Explained
The U.S. Treasury issues debt instruments in the form of bills, notes and bonds. Treasury bills are sold at a discount and redeemed for their full value in one year or less. Notes have a term of one to 10 years. Bond terms are longer than 10 years, the securities maturing in as many as 20 or 30 years. Notes and bonds pay interest every six months. In addition to being safe, Treasury securities, unlike many debt instruments, are easy to sell for cash. You can buy them at auction directly from the government fee-free or through a broker for a fee.
The concept of yield may read as straightforward, but in the world of bond investing, things are a bit topsy-turvy. The yield on a bond is the return from the investment. In the most immediate terms, it equates to the price of the bond divided by the interest rate. However, bond prices change on a daily basis. The price and yield are in inverse relation. When the price of a bond goes up, the yield drops. When the price falls, the yield rises. When you are holding bonds, news that yields have plummeted can be a comfort because it means you can sell your bonds at a higher price.
Compounding Over Time
At the end of the term for the note or bond -- 10 years, for example -- the government repays the principal amount along with the final payment of interest. If yields do not rise or fall dramatically during the bond term, you'll receive a modest return on your investment. Consequently, the best way to profit is to make large investments in Treasury securities and reinvest at maturity for a period of 30 to 40 years or more. If you begin in your 20s to put large amounts of cash in Treasury bonds, you can realize a healthy return by retirement age.
Bond Market Volatility
As of this writing, as in other periods of relative economic instability, the bond markets are turbulent. According to The Wall Street Journal, "when overall yield levels are low, relatively small changes in interest rates can generate large changes in price." If you happen to enter the Treasury market during a similar period, you're in luck. During the first five months of 2012, for example, Treasury bond returns outstripped those of the Standard & Poor's 500 stock market index.
Funds that are tied to market indexes can also spell opportunity. Shop for an exchange traded fund that offers a return in direct relation to the Treasury bond's interest rate. When the interest rate rises, your returns will climb accordingly.
- Bond Ladders Vs. Bond ETFs
- Do Bonds Compound Interest?
- How do I Compute Bond Yields?
- What Is the Penalty of Cashing in T-Bills Before Maturity?
- Understanding Bond Mutual Funds
- Yield to Maturity Vs. Spot Rate
- Butterfly in Fixed Income Trading Strategies
- What Are the Advantages & Disadvantages of U.S. Treasury Bonds?