Should I buy Treasuries or municipal bonds?
Munis offer more value relative to bonds with similar risks
In the search for yield, municipal bonds shine relative to similar, lower-risk fixed income such as Treasuries, as well as investment grade bonds. Currently, tax-free municipal bonds yield 75% as much as (federally taxable) Treasury bonds.
Munis offer more value relative to bonds with similar risks
In the search for yield, municipal bonds shine relative to similar, lower-risk fixed income such as Treasuries, as well as investment grade bonds. Currently, tax-free municipal bonds yield 75% as much as (federally taxable) Treasury bonds.
Compared with Treasury notes and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.
Cons: Lower Returns: While treasuries are safe, their yields are generally lower than riskier assets like stocks or corporate bonds. Short-term investors may find their returns to be relatively modest.
Bond funds offer a cost advantage over regular investors purchasing individual bonds, as they pay much lower bid/ask spreads on their bond transactions. This makes bond funds a more cost-effective option for investors looking to invest in bonds.
If you sit in the 35% income tax bracket and live in a state with relatively high income tax rates, then investing in municipal bonds (munis, for short) will likely be a better option than taxable bonds. Alternatively, if your income is in the 12% tax bracket, then you may want to steer clear of municipal bonds.
Municipal bonds don't hold up against inflation as well as stocks do. When inflation rises, a muni's fixed payment is less attractive. Still a chance of default. While default risk is very low, municipal bonds could still go into default.
Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.
U.S. Treasury bonds are often considered free of default risk, and the Fed sometimes buys them directly to stimulate the economy. Treasury zeros are in an ideal position to profit, particularly, if they are long-dated. Zero-coupon U.S. Treasury bonds can move up significantly when the Fed cuts rates aggressively.
Are Treasury bonds a good investment? Generally, yes, but that depends on your investing goals, your risk tolerance and your portfolio's makeup. With investing, in many cases, the higher the risk, the higher the potential return.
What happens to Treasury bills if the government shuts down?
Unlike a default, a shutdown does not affect the government's ability to pay its obligations, and, as noted, many critical services continue.
US Treasury Bond/ Federal Bonds
Investors favor Treasury bonds during a recession because they're considered to be a safe investment.
Often, CDs pay higher rates for longer term lengths. Treasury bills are short-term securities issued by the U.S. Treasury, with terms that range between four and 52 weeks. They are considered a type of bond, but don't pay a coupon (interest).
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
If you are looking for predictable value and certainty for your financial goals, then individual bonds may be a better fit. Meanwhile, if you are looking for professional management and want greater diversification for your financial goals, then bond funds may be a better fit.
In a recession, munis also tend to have a benefit shared by other fixed income sectors with interest rate sensitivity. The Fed could start cutting rates as the economy falters. Bond prices move inversely to interest rates.
Do Bonds Lose Money in a Recession? Bonds can perform well in a recession as investors tend to flock to bonds rather than stocks in times of economic downturns. This is because stocks are riskier as they are more volatile when markets are not doing well.
Retirees are often advised to shirt over to safer investments, like bonds. Municipal bonds offer the benefit of interest that's exempt from federal taxes. In some cases, state and local taxes won't apply, either.
Municipal bond yields are relatively attractive after considering the impact of taxes. Source: Bloomberg, as of 12/5/2023. Past performance is no guarantee of future results. The 50.8% tax rate assumes a 37% Federal tax, 3.8% ACA tax, and 10% state tax.
How do you avoid tax on Treasury bonds?
Use the Education Exclusion. With that in mind, you have one option for avoiding taxes on savings bonds: the education exclusion. You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs.
For investors who can benefit from tax-exempt income, a fixed-income-only portfolio should contain a substantial allocation to municipal bonds. We favor 25% or more. In the historical study described below, a 25% allocation to municipals increased annualized tax-equivalent return by 0.5% without increasing volatility.
- High-yield savings accounts.
- Certificates of deposit (CDs)
- Bonds.
- Funds.
- Stocks.
- Alternative investments and cryptocurrencies.
- Real estate.
T-Bill Redemptions and Interest Earned
T-bills are issued at a discount from the par value (also known as the face value) of the bill, meaning the purchase price is less than the face value of the bill. So, for example, a $1,000 bill might cost the investor $950.
There are several ways to buy Treasuries. For many people, TreasuryDirect is a good option; however, retirement savers and investors who already have brokerage accounts are often better off buying bonds on the secondary market or with exchange-traded funds (ETFs).
