In the world of investing, Treasuries are one of the most disrespected of all financial assets. I am frequently amazed by the plethora of financial pundits who will openly admit they can’t think of any reasons why investors should own Treasuries. Besides the important role that Treasuries play as collateral in the world’s financial system, they have other redeeming qualities as well. In no particular order, here are six things to like about Treasuries:
To see a list of high yielding CDs go here.
Liquidity – The tremendous amount of liquidity offered in the Treasury market is more than enough to meet the needs of nearly 100% of financial market participants. Of course, liquidity isn’t important until it is, and given the short-term thinking that is pervasive in the investing community, it wouldn’t be surprising if some have forgotten the important lessons about liquidity that should have been learned from the recent financial crisis. Keep in mind that liquidity can be a lifeline during periods of extreme market stress. And the Treasury market still provides sufficient liquidity to withstand the types of stresses that would ravage liquidity in other markets.
Call features – Treasuries are now non-callable. As a bondholder, I like knowing that the issuer cannot redeem the bond prior to maturity. It helps me plan with more certainty how to meet my future income needs.
State and local tax exemption – During a discussion about Treasury yields, you are quite unlikely to hear someone mention the fact that interest on Treasuries is exempt from state and local taxes. Financial pundits are usually very quick to remind investors about the importance of calculating the taxable-equivalent yield of a municipal bond, but they very rarely mention the importance of calculating the taxable-equivalent yield of a Treasury. Why is that? Your guess is as good as mine.
Low transaction costs – In terms of commissions on a Treasury trade, if you are paying more than zero, you are paying too much. I am not going to recommend any particular broker in this article. But if you spend a little time searching the commission schedules of some of the better known brokers, you will most likely come across the ones that offer $0 commissions on Treasury trades. When combining $0 commissions with narrow bid-ask spreads, it is hard to argue against the fact that transaction costs on Treasury trades can be quite low.
Negative correlation to stocks – The past is certainly no predictor of the future. But during each of the last two prolonged bear markets in equities (2000 to 2002 and 2007 to 2009) and the three most recent near-bear markets (1998, 2010 and 2011), Treasury prices exhibited a negative correlation to stock prices. As an aside, depending on the definition of “bear market,” some might consider the selloffs in 1998 and 2011 to be bear markets.
The benchmark – As the benchmark against which other parts of the bond market are measured, you do not have to worry about widening spreads affecting your Treasury’s price/yield. Even though you may come across someone who views Treasuries as “worthless,” etc., the fact remains that during times of economic troubles, spreads still widen. And because of that, if we are to believe Treasuries are “worthless,” what does that make other bonds? And because equities are further down the capital structure than corporate bonds, if Treasuries and corporate bonds are “worthless,” what does that make equities?
Despite my pointing out reasons to like Treasuries, you should not take that as a recommendation to buy Treasuries. I last purchased a Treasury on April 11, 2011, and, since that time, I have slowly been a seller of Treasuries. There are, of course, not just things to like about Treasuries. Even after the recent rise in yields, I still do not find Treasury yields attractive, even on a taxable-equivalent-yield basis. And with another debt ceiling debate fast approaching, I think readers would be wise to keep in mind the risk to Treasuries outlined in Chapter 1 of my book, The 5 Fundamentals of Building a Retirement Portfolio. But since Treasuries seem to be a favorite punching bag of so many in the financial community, I thought readers might be interested in some of the reasons to like Treasuries. Perhaps it will astonish some, but Treasuries actually have some redeeming qualities.
More from The Financial Lexicon:
Want to learn how to generate more income from your portfolio so you can live better? Get our free guide to income investing here.