Short-term Treasury yields are hitting new highs, making risk-free debt even more attractive to investors seeking security and income at a time when market yields are scarce. The yield on the 2-year government bond rose to 4.1% on Wednesday, the highest for the note since 2007. Bond yields move inversely with their prices. The move came after the US Federal Reserve hiked interest rates by 0.75 percentage point to tame inflation and hinted that more rate hikes were on the horizon. In August, the consumer price index rose by 0.1%. Economists polled by Dow Jones were expecting a 0.1% decline. The 2-year bond sits at the point on the Treasury yield curve that is most sensitive to Federal Reserve rate hikes. With the yield curve inverted, short-term debt securities now have higher yields than longer-term ones. These short-dated bonds are also now more compelling given the lackluster performance of equities this year. The S&P 500 is down almost 19% in 2022. Bond king Jeffrey Gundlach, CEO of DoubleLine Capital, said in a recent webcast that after several brutal years, the bond market is now the right place. “I think the possibilities are more exciting now than they have been in the last 10 years,” he said. Gundlach’s company recently bought long-dated government bonds. CNBC’s Jim Cramer, on the other hand, bought 2-year Treasury bills for his personal portfolio. For the first time in a long while, yields are more competitive than stock returns, he said. With short-term bonds, investors can get the high yield without a long-term commitment. For those who want to get some of the action, here’s what you need to know. Buying Directly from the Government You can buy Treasuries directly from the US government through their website TreasuryDirect.gov. You need to set up an account and link your bank to the website. The notes are sold in $100 increments and are typically issued within a week of the auction date. Auctions for the 2-, 3-, 5- and 7-year Treasuries take place every 4 weeks, while the 10-year auctions take place quarterly. Buying the sheet music makes income planning easy. “If you buy a single government bond and hold it to maturity, you know what your interest rates are going to be and you know your maturity value,” said Tim Utecht, chief investment officer at Jacksonville-based Chartered Financial Analyst Life Planning Partners, Fla . “You know exactly what you’re going to get.” You earn interest twice a year. If you hold the government bonds to maturity, you are not exposed to market risk. The downside to owning the security rather than investing in a Treasury fund is the lack of diversification unless you invest in bonds yourself. You also need to make sure you’re buying the right Treasuries based on your goals and time horizon. The investments are also separate from your other accounts, said certified financial planner Diahann Lassus, a managing principal at Peapack Private Wealth Management in New Providence, New Jersey. “It’s a bit more difficult for people who want to see everything together,” she said. You also can’t buy them in your IRA or Roth IRA, which Lassus believes is the biggest downside. If you wish to sell the bond before maturity, you cannot do so on the government website. Instead, you need to wire it to a bank, broker, or dealer. Buying Treasury Bonds Through a Brokerage Firm You can also buy Treasury bills in the secondary market by using a brokerage firm. You still get all the benefits of owning the security outright. For Utech, it’s the easiest way to buy the bonds, calling the government’s website “a bit cumbersome.” Online brokers like Fidelity and Charles Schwab have tables listing the yields of different government bonds so you can compare products, he said. In addition to offering secondary market bonds, both Fidelity and Schwab are selling newly issued Treasuries. Also note that you may not get the exact time horizon on the note on secondary government bond purchases, Utech said. Be sure to review all minimum purchase requirements and associated fees. At Schwab and Fidelity, for example, it’s free to buy Treasuries online, but broker-assisted trading costs $25 and $19.95, respectively. At Fidelity, the minimum purchase for treasury bills is $1,000. What Lassus likes about a brokerage is that you have the ability to have your investments all together, and you can even add them to an IRA or Roth IRA, she said. Bond Fund Exposure You can also gain exposure to the bond market through mutual funds and exchange traded funds. “It offers immediate diversification,” Lassus said. For example, a short-term government bond fund might have issues with maturities between one and three years. You can buy them through your brokerage, which might also make it easier to track performance along with the rest of your holdings. Below are four short-term Treasury funds. However, in a year like this, funds can slump and you have the prospect of losses. Income payments can also fluctuate because you have different bonds in the fund. Be aware of the fees involved, which could eat into your returns. Funds also have turnover and are therefore subject to capital gains tax, in contrast to individual bonds.
The yield on a 2-year government bond was just over 4.1%. How investors can get a risk-free return