With returns on U.S. government debt plunging to record lows, you may be wondering whether it's worth buying Treasurys, a low-risk financial instrument.
Treasury securities are government debt instruments issued by the U.S. Department of the Treasury to finance the national debt.
At the time of this writing, the one-month Treasury bill and the three-year Treasury are trading at 0.81% and 0.54%, respectively. The 10-year Treasury note, which matures 10 years upon issuance, is trading less than 1%. A steep drop from the month prior, when the 10-year Treasury traded at around 1.6%.
"If an investor wants maximum safety then the place to do it is in the Treasury market," says Richard Saperstein, a chief investment officer with Treasury Partners in New York.
Investors might be questioning their portfolios, with stocks falling more than 7% in early March, pushing U.S. Treasury yields to fresh lows.
Here are a few things, given the state of play, for individual investors to review when it comes to investing in Treasurys:
-- Risk of investing in Treasury bills and bonds.
-- Buy Treasurys for defense.
-- Corporate bonds are more attractive.
Risks of Investing In Treasury Bills And Bonds
T-bonds and T-bills have long been a standby for investors looking for relatively safe holdings because these fixed-income investments are backed by the U.S. government, which is the world's largest economy. As demand for U.S. government debt increases, so does the price. That, in turn, pushes the interest the bonds pay, or the yield, lower.
Recently, investors have been selling stocks and fleeing to the relative safety of Treasurys because they're worried about reduced production and lowered sales caused by the global spread of the coronavirus. Demand is pushed down as people go out less because of COVID-19, the respiratory disease caused by the coronavirus.
While it hasn't happened to a great extent in the United States, memories of shuttered factories and retail stores in the coronavirus epicenter of China are still fresh in the minds of investors.
Investor unease ratcheted up further on Monday as oil prices had their worst day since the Gulf War, the brief war fought in 1991 between Iraq and United Nations allies. Saudi Arabia slashed prices and said it would boost output after the kingdom, Russia and other major producers couldn't agree on a production cut that might have shored up prices hard hit by worries about demand for the commodity.
All that helped send the yield on the 10-year Treasury note -- a benchmark for mortgage rates, auto loans and student debt -- to a record low of 0.38% this week. The yield on the 30-year Treasury bond also hit a record low, bottoming out just below 0.7%.
That makes longer-dated U.S. debt a particularly unattractive investment from the perspective of earning money. But that's not really the point of holding Treasurys, says Jeff Gitterman, co-founder of Edison, New Jersey-based Gitterman Wealth Management.
Buy Treasurys for Defense
"Don't buy bonds for yield; buy bonds for defense," says Gitterman, who is unequivocal in saying Treasurys are still worth buying. "It really doesn't matter where the yield is. A large portion of your fixed-income portfolio should be Treasurys."
The risk to Treasury holders right now is that equities bounce back with a vigor, leaving people holding a poorly yielding product, he notes. But that's not as big a deal as if there is another big leg down in the stock market, he says.
To help clients have a measure of security amid the pronounced equities sell-off without getting locked into longer-term investments that will still yield poorly when equities have bounced back, Crossmark Global Investments is putting investors into short-term, liquid fixed income instruments.
Those include cash management bills or other Treasury bills on the very short end of the curve, says Victoria Fernandez, chief market strategist with the Houston-based investment management firm.
Saperstein agrees that investors should be cautious of buying long-term bonds, despite their safety.
Corporate Bonds Are More Attractive
At the moment, municipal and corporate bonds are better buys than Treasurys, Saperstein says, noting that as Treasury yields have gone down returns on corporate bonds of the same duration have become more attractive.
Even without recent fears about the coronavirus and an oil price war between Saudi Arabia and Russia, Treasury yields have been low after years of easy monetary policy from the Federal Reserve following the financial crisis.
Rates were still low even before the coronavirus scare caused the central bank last week to issue its first emergency rate cut since the financial crisis. And market participants are expecting another rate cut at the Federal Reserve's regularly scheduled meeting, according to the CME Group (ticker: CME) FedWatch Tool, which calculates probabilities based on the federal funds futures market.
Target rates are currently at 1% to 1.25%, and traders expect that rate to be lowered by either 50 basis points or 75 basis points at the next Federal Reserve meeting. The Fed is gathering on March 17-18 and again on April 28-29.
Also, as other developed economies haven't performed as well as that of the United States, some governments have lowered their policy interest rates into negative territory. That has given more incentive for foreigners to buy up Treasurys, putting further downward pressure on domestic yields.
But the proximity to record-low Treasury yields isn't stopping investors from buying U.S. government debt amid the stock market turmoil caused by the coronavirus outbreak.
Every day over the past week, Crossmark has been adding new clients who want to invest in fixed-income, Fernandez says.
"We're seeing that flight to quality," she says. "People are coming into this market for security."
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