Sure, Treasuries are safe, but they're a lousy deal

— -- Normally, you should have a good reason to make any investment, and a good reason isn't "because everyone else is." Right now, there aren't any good reasons to invest in Treasury notes and bonds, even though everyone else on the planet is buying them. If you need income from your investments, you can do better elsewhere.

The U.S. government owes $11.5 trillion to, well, just about everyone. It finances that debt by issuing Treasury securities, which are interest-bearing IOUs.

What is most remarkable about the public debt is how little interest the government has to pay. A three-month T-bill currently pays 0.17% annual interest, meaning that if you invested $1 million in a three-month T-bill, you'd get all of $425 in interest.

You get more interest by investing in longer-term Treasuries. For example, the most recently issued 10-year T-note yields 3.58%. But even that is low by historical standards: 10-year T-notes have averaged a 6.45% yield since 1953.

It's unlikely that yields on Treasuries will remain this low for long. The main reason: supply and demand. As the U.S. adds to its debt each year, it will have a harder time finding investors willing to buy its Treasury securities.

The U.S. doesn't have enough investors to buy all of its debt, and it's increasingly relying on foreigners to sop up any excess. Ten years ago, foreign investors owned 22% of U.S. debt; today they own 29%. China is our largest creditor: It owns $802 billion of Treasury securities. Japan is next in line, with $677 billion, according to the Treasury.

At the moment, demand is on the side of the U.S.: In times of financial turmoil, investors seek the safety of the government's guarantee. Treasuries are so safe that they have virtually no default risk. (And if the government does default, you'll have bigger things to worry about than your T-bills.)

Sooner or later, however, demand will slow down, and the Treasury will have to pay higher interest rates to attract new investors. "You can't issue this much debt without having either an inflation or a supply-and-demand issue," says Craig Elder, fixed-income analyst at Robert W. Baird & Co., a Milwaukee-based investment company.

You won't be happy if you own a Treasury note and interest rates rise. Sure, you can hold your T-note until it matures, and collect interest in the meantime. But your interest payments will look puny as rates rise.

If you decide to sell your T-note before it matures, you'll be in for a shock. The current 10-year T-note pays 3.125% a year, or $312.50 on a $10,000 investment. The 3.125% rate is called the coupon rate, and it doesn't change.

But the price of your T-note will change if you sell it before it matures. Traders will push its price down to increase its yield, which is the interest payment divided by its price.

Let's say that rates rise to 4% and you decide to sell. You'd have to cut your price to $9,375 to get the yield to 4%. If rates returned to their long-term average of 6.5%, your T-note's price would fall to $7,955.

True, you'd make money if interest rates fell. If rates fell to 2%, for example, you could sell your T-note for $10,937. But there's a whole lot more room for rates to rise than for rates to fall.

What's an income investor to do? If you feel you can't take any risk with your money, you have pretty limited options. The first: Consider buying top-yielding bank CDs, which currently return more than Treasuries of similar maturities.

Or, if you must have Treasuries, construct a short-term ladder. Every three months, buy equal amounts of one-year, three-year and five-year Treasuries. If you did that now, your average yield would be about 1.7%. As rates rise, however, your average yield will rise, too. (Had you started five years ago, your average yield would be 3.8% now.)

If you're not worried about risk, consider investing in stocks of companies with a long-term history of raising their dividends. Some of the nation's top companies have dividend yields of 3% or more and, unlike Treasury notes, these stocks will likely increase their payouts over time.

Even though much of the world is buying Treasuries, it makes little sense to lock into current rates for any long period of time. And, as your mom would tell you, just because everyone else is buying T-notes, that's no reason for you to do it, too.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com. Twitter: www.twitter.com/johnwaggoner.