Welcome to CNBC Select’s advice column, Getting Your Money Right, where financial advisor Kristin O’Keeffe Merrick will be answering your pressing money questions. You can read her last installment here on how to survive tax season. Have a question you want to ask? Send us a note at [email protected].
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Everyone seems to be looking for places to park cash these days in order to earn more interest. Someone mentioned Treasury bonds but I don’t know much about them. Can you explain how they work?
Interested In Interest
If you had told me a year ago that I would be interested in Treasury bonds, I would have laughed at you. However, the world has changed and suddenly, interest is back in a big way. For the first time in almost a decade, you can earn meaningful interest on simple financial instruments thanks to high rates.
Let’s start with the basics. A Treasury instrument (note, bill or bond) is debt issued by the U.S. Treasury. This means that when you buy a U.S. Treasury security, you are essentially loaning money to the U.S. government for the duration of the security. For example, when you buy a two-year Treasury note, you give money to the U.S. government, which will pay you back a specific, fixed amount of interest every six months for two years. At the end of the two years, the security has “matured” and the government returns your principal deposit — meaning you’ll be left with your initial investment plus any interest you earned.
There are three main types of Treasury securities — T-bonds, T-notes and T-bills. All three are traded in a highly liquid secondary market known as the bond market. Sometimes people call the bond market the fixed-income market, because these securities deliver a fixed rate of interest that’s paid out periodically.
Treasury bonds, notes, and bills all have different maturation rates:
- Treasury bonds are long-term bonds that mature after 20 or 30 years.
- Treasury notes are products that mature after two, three, five, seven or ten years
- Treasury bills are anything that matures in less than two years
All of these instruments have pros and cons in terms of investing. They also trade based on the conditions of the overall economy and what’s going on with interest rates. If rates in general are going up, the rates associated with these instruments go up as well. And when rates go up on bonds, prices go down.
In the current climate, we’ve seen rates climb steadily due to inflation and the actions of the Federal Reserve. The Fed has raised rates consistently and considerably over the past 18 months. As a result, these Treasury instruments are producing rates of interest that attract investors.
If you’re interested in diving into the world of Treasury securities, you have a couple of ways to get started. You can purchase these products directly from TreasuryDirect.gov, or you could go through your brokerage. And while you can’t buy individual bonds, bills or notes with a robo-advisor, you can use one to invest in exchange-traded funds tied to a range of Treasury securities.
CNBC Select ranks TD Ameritrade as one of the best brokerage platforms thanks to its expansive selection of tools, research and guidance that can help you build a portfolio filled with Treasury products, stocks and more. And Wealthfront, one of the first robo-advisors to hit the market, features a low 0.25% annual advisory fee and other perks such as tax-loss harvesting. While you don’t have to use either a brokerage or a robo-advisor to get started with Treasury securities, doing so can help make sure your bonds, notes and bills are better integrated into your overall investment strategy.
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To understand which specific Treasury product makes the most sense for you — bonds, notes or bills — you need to determine how long you want your money invested and what interest rate these products are offering. Normally, the longer the duration of the security, the more it yields for you in interest. But in the current environment, you’ll earn more interest from a shorter-term product (such as a Treasury bill) than a longer-term one (such as a bond).
Regardless of which type of security you purchase, the risk to you is quite low if you plan to hold the instruments to maturity. That’s because the United States has never defaulted on its debt obligations, and the likelihood it will in the future remains low. However, the low risk of Treasury products means they don’t pay as much as municipal, corporate, or other types of bonds.
I want to point out a few important things. These products are completely different from U.S. savings bonds (there’s no secondary market where you can sell and buy savings bonds, for example). Second, these instruments are very liquid (easy to sell) in the event you need your money back. Finally, you can ladder your approach to Treasuries (similar to how you would with CDs) depending on your cash flow.
The only remaining question I’ve been receiving is about how Treasury products compare to high-yield savings accounts. I won’t say that one is better than the other — they’re simply different ways to earn money on your money. That said, if you’re interested in watching your cash grow in a high-yield savings account, you should take a look at Marcus by Goldman Sachs High Yield Online Savings, which CNBC Select picked as one of the best accounts on the market. It requires no minimum deposit and charges no fees, plus you can easily access your funds online.
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At this time, there is no limit to the number of withdrawals or transfers you can make from your online savings account
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I hope this helps clear up a few things for you! Remember that in this environment, it doesn’t make sense for your cash to sit someplace where it’s not making money.
All the best,
Kristin O’Keeffe Merrick is a Financial Advisor and money expert at her family-run firm, O’Keeffe Financial Partners, located in Fairfield, NJ.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.