What are US Government Bonds & Where to Buy?

When you buy a government bond from the US Treasury, you’re loaning money to the government at a set interest rate for a specific period of time. This is considered to be one of the safest investment options, especially for fixed income generation. The bonds are backed by the US Government, which has never defaulted in the past.

Even though there are a lot of different kinds of bonds, US Treasury bonds are one of the most desired because of the credit worthiness of the country. When you add bonds to your portfolio, you’ll help to stabilize it by reducing volatility. Anyone looking to invest in a passive income stream with low risk will usually prefer Treasury bonds.

US Treasury Bonds

The United States Government sells a wide variety of securities to raise money. One of these types of securities is a Treasury Bonds. Treasury bonds are long-term investments offered with 20 or 30 year maturity terms. If you want shorter maturities, Treasury Notes offer 2-10 year terms and Treasury Bills are less than 1 year.

When you buy a treasury bond, you’ll receive an interest payment every six months. When the bond reaches maturity, you’ll get back your initial investment. This makes it a perfect option for fixed income generation. Someone entering their retirement years could sell their entire portfolio and buy all Treasury Bonds. They would then receive a set amount of income every six months, and this income would likely continue throughout all of their golden years. If a bond reaches maturity and you still need the income, just buy another one.

The downside to bonds involves interest rates. Sometimes it just isn’t worth it to buy these securities because of the horribly low interest rate they offer. Good economic times will often bring low interest rates, while a struggling economy will typically have higher rates. If you can time your purchase to get good rates, especially if you believe the rate will outpace inflation, it can be a good time to buy.

Where to Buy

All US Government bonds are originally bought through their special government securities website here: US TreasuryDirect. This site has a $100 minimum investment amount.

You can also buy treasury bonds through a broker. If you use Fidelity for your retirement account, for example, you can login to your account and purchase directly through that account.

Some people prefer to buy through their broker just for ease of use and to keep their entire portfolio in one location. On TreasuryDirect, bonds are sold through an auction. Even though there are usually 300 or more each year, it’s possible you may not be able to buy them at any given moment. Through a broker, you should be able to buy them any time.

When to Buy Bonds

Depending on your age and your investment goals, your usage of government bonds can vary drastically. On average long-term, bonds provide a lower rate of return compared with stocks. However, bonds are still attractive because they’re low risk compared to high risk stocks.

If you’re very close to retirement age and interest rates are good, you may want to consider rolling your stocks into bonds. A recession right before retirement can cripple a portfolio and you may not have enough time to wait for a recovery. In the past, there have been periods where it takes 10+ years for prices to completely recover from a crash.

For these reasons and more, buying treasury bonds can be a bit of a juggling act. When the stock market is consistently falling and hard to generate returns with it (like right now in current markets), bonds can be much more attractive than usual. Some investors may choose to flip back and forth between stocks and short-term bonds numerous times over their career simply to take advantage of the best returns possible given the current economic environment.

Bonds, Recessions & Inflation

Recessions, stock market crashes and especially inflation can all play a key role in determining whether Treasury bonds are a good choice for your portfolio. Standard Treasury bonds will pay you a set interest rate over the set term. You need to consider how that return will compare with long-term stock market returns. However, you also need to consider how bond returns will compare with inflation.

Before the COVID pandemic, we had more than a decade of low inflation rates. Between 2009 and 2020, inflation was less than 2% for all but 4 years. Three of those 4 years topped 2% and only one year was above 3%. Long-term, the average inflation is a bit below 4% though. 2021 hit 4.7% inflation and 2022 just as bad. Inflation is predicted to drop in years after that, but it can also be hard to accurately predict this long-term.

If inflation will outpace the returns on a bond, you’re losing purchasing power with your money over time even if you’re making a small profit. Another US government security called Treasury Inflation Protected Securities or TIPS works like a bond except your principal investment adjusts with the rate of inflation. If the rate of return on a Treasury bond minus the rate of return on a TIPS bond is less than the current rate of inflation, you’re better off owning TIPS over standard bonds.

Bond Downside Risks

Even though a US Treasury Bond is considered to be one of the lowest risk investments for fixed income, it’s not entirely risk-free. All bonds are only worth as much as the government or company backing them up. The United States has an excellent credit rating and is not likely to default on debt obligations. However, it’s still possible to happen.

Beyond the risk of a default, your main risk that is more common is simply getting stuck owning a security that earns lower returns compared with other options. For example, if you buy a 20-year Treasury Bond today at 3.5% interest, you’ll wish you had waited if rates go up to 5% next month.

You can always sell bonds before their maturity date and buy a new bond at a better rate. However, when rates go up after you buy your bond, the value of your bond on the open market goes down. This means you end up taking a loss on your investment to switch to a better rate or you’re stuck with the lower rate until maturity.