Treasury bills, notes and bonds have risk, too
— -- Q: We are retired, in our seventies and want to preserve our investment principal. Are Treasury notes a good investment for us?
A: Ideally, even in your seventies, you should own some stocks to hedge against inflation. But if you can't stand the risk, Treasuries, debt instruments sold by the U.S. government, are a good place for you.
When you lend money to the government by buying a Treasury bill, note or bond, you're getting an investment backed by the full faith and credit of the U.S. government. In other words, you'll get your interest and principal back unless the U.S. government fails. Sure, it's possible the government will default on its IOUs, but if that happens, the last thing you'll be worried about is your investment.
The Treasury sells three kinds of securities:
• Bills. These securities mature, and the principal must be repaid, in 26 weeks or less after they are issued. These are generally the safest Treasuries because you get your money back fastest.
• Notes. These securities mature in 2, 5 and 10 years and pay interest every six months.
• Bonds. These Treasuries mature in 30 years, and also pay interest every six months.
Because Treasury bills have the shortest maturities, they are the safest of all the Treasuries. But wait? How can one Treasury be safer or riskier than another? They're all backed by the federal government.
Yes, but it's important for investors to remember that there are risks to owning Treasuries, even though there's no significant risk the government will default on its debt. What's the risk? It is interest-rate risk.
Let's say you own a Treasury bond that pays 5% interest. If prices for food and energy skyrocket, and inflation ticks up, market interest rates will also rise. Let's say rates go to 7%. Suddenly, the 5% interest rate on your Treasury is underwhelming. That makes the value of your bond fall. If you have to sell it, you'll get less than face value. You'll still get your full face value back when the bond matures, but it won't be worth as much as you thought it would be.
