Good Return, High Safety: Uncle Sam's the Man
If the stock market's dizzying spins give you and your savings portfolio the jitters, Treasury bonds may be the anchor you're looking for.
For safety, they are unparalleled. They represent a loan to the United States of America, which backs them with the full faith and credit of the US Treasury.
But until recently, high safety carried low returns.
With yields on T-bonds and bills have edged higher, investors have an unusual window to combine both safety and return. Treasury bonds now pay about 6.9 percent; two weeks ago they touched 7.15 percent. Stocks, by comparison, return around 10 percent, and can lose money.
Several top investment houses are now drawing attention to Treasuries. "We're not necessarily recommending investors buy bonds, but we are saying that they now look very attractive," says Mitchell Held, chief economist at Smith, Barney. "The [30-year] long bond will probably fall to around 6.5 percent before the year is over," which makes current rates attractive.
Timing is important, says Robert Heady of Bank Rate Monitor in North Palm Beach, Fla.
"If you believe that rates are going to be rising ... you probably want to 'go short,' that is, buy instruments of shorter maturities now, and then lock in a higher rate later [on longer-term issues]. If you believe rates will be declining, then you might want to 'go long' and buy longer-term issues now."
Treasury securities are especially appealing at a time of rate uncertainty. While the bonds pay a slightly lower rate than top-grade corporate issues, they are exempt from state and local taxes.
For investors in high tax brackets, total return can equal or exceed return for nongovernment bonds.
Treasuries, however, do carry some risk. Their "profit," total return, comes from price appreciation plus earned interest. Whenever interest rates rise, bond prices drop; so if you sell before maturity, you could take a loss.
The risk can be particularly pronounced with bond mutual funds because your investment never really matures. The fund owns a variety of bonds with a variety of maturity dates. Bond prices change daily, reflecting market conditions. So you can lose money if you sell a shares in a bond fund while rates are rising. In 1994, for example, US Treasury bond funds lost more than 6 percent.
If individual bonds seem the better choice, you can buy a Treasury issue through a bank or brokerage house. Commissions run between $50 and $100. Or you can buy directly from Uncle Sam, who charges no commission (see story, left).
Treasury securities come in bills, notes, and bonds.
*Bills mature in one year or less. Minimum: $10,000.
*Notes mature in one to 10 years. Minimum for two- and three-year issues: $5,000, with additional increments of $1,000. Notes of five years or longer carry minimums of $1,000.
*Bonds mature in 10 to 30 years. Minimum: $1,000.
BUY DIRECT AND SAVE
To buy a Treasury security directly from Uncle Sam:
Call your local Treasury office or 202-874-4000 to request a new account or ask about auction dates.
If you know exactly which security you want to buy, ask for a "tender form." The form asks about a "competitive" or "noncompetitive" bid. Newcomers should generally pick a noncompetitive bid, which means they receive the average interest rate at the auction.
For a three-month T-bill, send $10,000 in a certified check. For other Treasuries, a personal or certified check is fine.
Your account becomes a computerized listing. You will not receive an actual "security."
Whenever something occurs within your account, such as an interest payment, your rich Uncle sends you a statement.