Q: Why would anyone buy U.S. Treasury securities over just putting the money in a savings account that pays a high rate of interest?
A: For someone considering putting money into U.S. Treasuries today, you make a valid point.
Bond investors have gotten so nervous about the safety of their money, they're willing to lend it to the U.S. government for next to nothing. So many investors are buying 10-year Treasury notes, for instance, that its yield has been pushed down to 2.6%. That's not even enough to keep up with inflation.
But that doesn't mean buying Treasuries is always a bad idea. U.S. government securities can be a useful part of most investors' portfolios. For one thing, the interest is exempt from state tax, if your state has an income tax. That raises your effective return. And while high-yield savings accounts can be a great place to park "rainy day" cash, Treasuries may offer a bit of bedrock to your portfolio.
To understand, let's pretend you asked this question a year ago. Back in January 2008, the 10-year Treasury note yielded around 4%, about the same as savers could get from high-yield savings accounts. Many wondered why one would buy a Treasury in that case. After all, the savings account is FDIC insured.
Here's why: If you bought the Treasury a year ago, you'd still be collecting your 4% interest now. Meanwhile, the rates paid on "high-yield savings" accounts have been in freefall.
The chart at left shows how quickly ING Direct's published interest rates on savings accounts fell last year.
Can you lose money on Treasuries? Certainly. If interest rates rise above 4%, your 4% yield won't look so hot, and you'll lose principal if you have to sell your T-note. But even if interest rates rise, you'll get your entire principal back if you hold the Treasury note until it matures. And the risk of higher interest rates is a big reason why you should always "ladder" your bond portfolio, and add some higher-yielding bonds if rates rise. USA TODAY investing columnist John Waggoner tells you how to build a laddered Treasury portfolio here.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at firstname.lastname@example.org. Click here to see previous Ask Matt columns.