Investing in US Saving Bonds, Treasury Bills, and Treasury Notes

This category takes in various forms of investments offered by the federal government. They include one thing you may already know the good old U.S. savings bond. Others include such investments as Treasury bills and Treasury notes, all of which offer various types of returns. In so many words, government securities are IOUs to the federal government you lend it and allocating money for a period of time, and it repays you with interest.

The nice thing about this arrangement is that it offers a great deal of flexibility. For instance, you can buy a Treasury bill that you can cash in as fast as three months; by the same token, there are Treasury bonds that you can hold onto for as long as 30 years. Another thing unlike most other types of investments, government securities are guaranteed by the federal government, so there’s virtually no chance whatsoever of your losing money.

Unfortunately, there is the inevitable downside. Returns from government securities are rather, shall we say, diminutive. For instance, as of this writing, a one-year Treasury bill is paying roughly 4.5%. A 30-year Treasury bond isn’t faring much better at about 5%. (These returns, by the way, are free of state and local income tax but not federal.)

There are potential headaches even with savings bonds, long the gift of choice for graduates. The most commonly known savings bond is the Series EE, which you buy at half the “face value” (for instance, you pay $50 for a $100 bond). You can hang onto these for up to 30 years, and they accrue interest rates (as of this writing, a bit more than 5% again, not absolutely dreadful, but nothing to write home about, either).

Although savings bonds can be effective for long-term savings, just how much you get out of them is predicated on how long you hang onto them. For instance, you can cash in a savings bond after only six months, but you’ll get only half the face value, plus any interest. Things don’t get a whole lot better if you wait a bit longer as an example, a $100 bond bought in January 1996 would bring you only $57 if you cashed it in three years later. In fact, to have a $100 EE bond reach face value in February 1999, you would have had to buy it back in February 1987a full 12 years’ wait.

My feeling about these kinds of investments is that they can be a good place for your savings they certainly beat savings account returns hands down. And they’re certainly a suitable choice for an ultraconservative investor who doesn’t want to run the least bit of risk. Moreover, particularly with savings bonds, they can be convenient to buy (if you’re working, there’s a chance your employer may offer an automatic payroll deduction plan to buy savings bonds). And for a short-term place to park money that you plan to invest somewhere else, Treasury bills are a nice choice.

But bear in mind that all these investments pay out rather modest returns (all the more so if you factor in inflation). And, with savings bonds, you can end up in the tank if you’re not prepared to stick with them for a good long while. So, even though they may have a place as an adjunct spot for a portion of your money, there are better places to put the lion’s share of your bucks, particularly if you’re young with a long investment horizon and best time of investment.