Why would Individuals buy Treasuries or Treasury Funds?

[foxfirev5]

As an individual investor bank FDIC interest rates are so much higher than comparable maturity treasuries ( example 5 year CD 2.4% 10 year treas 2.2%). This has led me to dump any treasury funds as well as BND and AGG total bond funds. I can beat the income of treasuries with a ladder of CD's and overall lower duration. A small allocation of approx. 15%-20% corporate bonds, LQD or VCIT give me higher income with lower duration, risk and expense ratio when compared to the indexes

The fact I'm giving up mortgages is not a consideration since I already have enough with other holdings. Likewise liquidity is not an issue with adequate cash reserves and a portion of the CD's maturing each year.

I feel that the CD's below the 250k cap per bank are one area the small guy has an advantage over the institutional investors.

Thoughts?
.

 

[Blue Collar Guy]

If i ever see a 30 year treasury at 13% Im buying it, lots of them.

 

[foxfirev5]

Last time I saw that I had a 18% mortgage!

 

[OldShooter]

.. Thoughts?.

I've never looked a this, but probably the CDs are less liquid if you need to sell before maturity and if you have to redeem early you get whacked a penalty. It might be worthwhile to take your question to the bond specialists wherever it is that you are trading.

But it may be as you say, somebody parking a large amount of money is not going to want to break it into guaranteed CD-size chunks, where that is not a big deal for an individual with smaller money.

 

[pb4uski]

While penalties vary by bank, they are typically 1/2 a year of interest. What I have done is split my $250k into five $50k CDs so if I need some liquidity I can just redeem one or more CDs without having to redeem the entire $250k.

 

[OUTLAW]

What makes Treasuries attractive is their Tax Exempt interest.

 

[Bryan Barnfellow]

What makes Treasuries attractive is their Tax Exempt interest.

Just to be clear: state and local only. Feds still tax the interest paid.

-BB

 

[foxfirev5]

Thanks for the input. To clarify these CD's are in a tax deferred brokerage account. The state tax advantage of treasuries is not a factor here. Also I realize that I'm giving up liquidity with brokered CD's but the ladder and adequate other sources should be enough.
The CD's represent about 60% of my fixed income holdings. I still hold DBLTX and PIMIX mutual funds in tax deferred as well as Series I bonds in a treasury account.

At this point of my life and with current market conditions any excess earnings (it's not much) are going to be reinvested in the CD ladder.

 

[Earl E Retyre]

As an individual investor bank FDIC interest rates are so much higher than comparable maturity treasuries ( example 5 year CD 2.4% 10 year treas 2.2%) ... I feel that the CD's below the 250k cap per bank are one area the small guy has an advantage over the institutional investors.

Totally agree with you ... I have no idea why one buys treasuries when FDIC CDs with short term withdrawal penalties pay so much more.

If I had to venture a guess, those buying treasuries would be individuals who do not "trust" the banks that offer the higher CD rates especially if they are online only.

But, I had the same question as you.

 

[Gotadimple]

And some individuals choose not to go through the hassle of buying individual securities (bonds or cds) and choose to invest in mutual funds to do the job. There is still a reason to invest in both treasuries and corporate bonds. When times are tough, the market value of the Treasuries rises in relation to corporate bonds.

Rather than spending time qualifying the issuer, using a fund or etf takes care of the paperwork and research, and provides an easy exit when needed.

- Rita

 

[jebmke]

We still hold about 10-12% of our fixed income in Tips.

 

[Doc0]

A ladder of CD's is great as long as inflation stays low. Not so much if it kicks high.

Best

 

[NW-Bound]

Last time I saw that I had a 18% mortgage!

My 1st mortgage was for 14%, and I later patted myself on the back for being lucky when it climbed even higher. Oh boy, mortgage interest deduction galore!

If one remembers that, then he also remembers when interests on credit cards and auto loans were tax deductible.

 

[RetireAge50]

While penalties vary by bank, they are typically 1/2 a year of interest. What I have done is split my $250k into five $50k CDs so if I need some liquidity I can just redeem one or more CDs without having to redeem the entire $250k.

Wait. That much cash?

 

[Spock]

And some individuals choose not to go through the hassle of buying individual securities (bonds or cds) and choose to invest in mutual funds to do the job. There is still a reason to invest in both treasuries and corporate bonds. When times are tough, the market value of the Treasuries rises in relation to corporate bonds.

Rather than spending time qualifying the issuer, using a fund or etf takes care of the paperwork and research, and provides an easy exit when needed.

- Rita

Same with using somebody like Fidelity to build a brokered CD ladder. You don't care about the bank because the bank is FDIC insured. Fidelity automatically peanut butters the amounts among the banks to keep you below FDIC insurance limits.

 

[pb4uski]

Wait. That much cash?

Really more a bond substitute than cash. The CDs I was referring to I bought about 3 1/2 years ago from PenFed. 3% for 5 years with no credit or interest rate risk. Better than any credit worthy, five year bonds available at the time.

 

[GrayHare]

Why would Individuals buy Treasuries or Treasury Funds?

One reason could be that Treasuries are not subject to bank failures.

 

[pb4uski]

Neither are FDIC insured CDs as long as you stay under the limits.

 

[Running_Man]

Treasuries are the most liquid debt instrument. For the prior 8-9 years you could buy a 5 year US Treasury at say 2.25 and when the yield curve was higher before interest rates were raised in 2 years you hold for 2 years earning 4.5% and sell when 3 year yields 1.25 percent and make another 3% or 7.5% in two years and buy the 5 year again. At present this strategy is not as profitable as you would only make an additional one percent at present rates but still for the ultimate safety you would get 4.6% over 2 years, assuming rates do not change.

Or say Bond Prices return to the 2013 when 5 year sold for 2.2% yield and 3 year for 1.5% you sell the bond after holding for two years pocket a 1% profit and reinvest at the higher 2.2% yield, no early withdrawal penalties for treasuries, in fact the price will include accrued interest

 

[imokurok]

I agree, and I've been setting up a CD ladder each quarter this year as I'm headed into OMY stage. Going forward, each year, each quarter, CD comes due and I'll roll it into 5 yr with presumably highest interest. Going forward, every quarter I'll have one coming due in case of need. Not the highest returns, but part of a balanced portfolio that provides some stability and safety. Stocks more interesting and potentially rewarding, but prudence dictates some balance at this point in life. DW likes familiarity of CD, FDIC assurance, and safety.

 

[imokurok]

Synchrony Bank 2.3% for 5 yr, 1.4% for 1 yr.

 

[RobLJ]

Actually I reduced cash to buy BTTRX (American Century Zero Coupon Fund 2025) in early 2017, as a hedge against a stock correction. Would have bought more a month or two ago but the upward performance has been. . . a bit too enthusiastic.
It returns money to investors in 2025, so it's a bit like the bullet funds, so to some degree is "like" buying an 8 year bond (well, not really, but I'll not go into the differences.) This is not a recommendation, just a comment/response to the OP question.

If it goes down in the next 6 months, I'll buy more. It's a stock market hedge, however imperfect, in my main account in which I cannot buy options or stocks (or ETFs), just to forestall some comments. I expected it to go down after I bought it, and instead it went up (the portfolio was very low on "long" bonds.)

 

[OldShooter]

... BTTRX (American Century Zero Coupon Fund 2025) ...

Sorry, I have to ask: Why would you pay 56bps to have someone make completely brainless and risk free bond purchases for you?

You could just give their list of holdings to the FIDO, Vanguard, or Schwab bond desk and say "I'll have some of what they are having."

Instant savings: 56bps.

 

[RenoJay]

I agree with the original poster. CDs strike me as safer, and yield at least as much as government debt. Another thing to consider is CD longevity. Back in 2011, I locked into several CDs. One of them had a nice (at the time) yield of 3% on a ten year CD vs. about 2.2% on the five year CDs I was looking at. I looked at the penalty for early withdrawl, and realized that after some reasonable period of time (maybe 2 years?) I'd do better on the 10 year CD, even if I took all the funds out early. So be sure to do this equation...sometimes you can do better on long terms without reducing liquidity by much.

Someone had mentioned that govt. debt can do better "assuming that interest rates do ______." If you're willing to make bets on the direction of interest rates, you might as well seek higher yield through some form of peer to peer lending, because guessing interest rate direction involves a much deeper level of analysis, and risk, than simply buying a fixed income instrument for the coupon.

 

[gcgang]

Actually I reduced cash to buy BTTRX (American Century Zero Coupon Fund 2025) in early 2017, as a hedge against a stock correction. Would have bought more a month or two ago but the upward performance has been. . . a bit too enthusiastic.
It returns money to investors in 2025, so it's a bit like the bullet funds, so to some degree is "like" buying an 8 year bond (well, not really, but I'll not go into the differences.) This is not a recommendation, just a comment/response to the OP question.

If it goes down in the next 6 months, I'll buy more. It's a stock market hedge, however imperfect, in my main account in which I cannot buy options or stocks (or ETFs), just to forestall some comments. I expected it to go down after I bought it, and instead it went up (the portfolio was very low on "long" bonds.)

You need some EDV if you want to juice up your "long" bonds. I bought small amount last November just to track long rates. Thought it would crater as rates went up. But it's gone up 5% in value. I agree with your premise that it's a hedge, however imperfect, against a precipitous stock decline. I just can't make myself reposition a meaningful amount to a 25 year zero at 2.75%. I haven't dug out my HP-12C to see how much of a decline in rates you'd need to make 25%, but I'm guessing you might get there around 2.0%? Anyone up for negative rates?