Political turmoil is saturating financial market conditions. In the fall of 2018, US Treasury bonds experienced a yield rate inversion of five-year and three-year notes. They aren’t supposed to do that. The following summer, ten-year and five-year yields inverted as well—an unprecedented event by the standards of most bond market experts and the US government itself. Why is this important?
Our government issues bonds with the intent of paying a higher yield in exchange for holding them over longer periods. When shorter-term notes begin to pay higher yields than longer-term notes, this indicates that the government is burning through cash at a faster rate than we, as a country, are generating in revenue. We quit reducing the balance sheet (of outstanding debt), which means we must guarantee higher than normal yields on newly issued notes.
However, despite so much political uncertainty, the US economy is resilient. We have long-term stability from our free capital markets. When we do experience political upheavals, we don’t face the sort that leads to the social destabilization that we witness happening in so many other countries. Keeping this in mind, investing in US Treasury bonds should always be on the table as an option to consider as part of your investing strategy. How you invest in them will depend on what your financial goals are and what percentage of your portfolio allocation they should take up.
If you are established in your career and have a long-term retirement plan in place, then you should consider a variety of treasury vehicles within your investment strategy. Here are some scenarios to consider, from the shortest term to the longest-term note. Direct your investment capital toward shorter-term three- or six-month notes if you are in preparation to invest in a fund(s) in six months. The yields you gain for these periods of investing in government bonds are usually better than what you would gain from your bank by leaving the cash in a savings account alone. You can also compare treasury yields to your bank’s three and six-month certificates of deposit yields as well. Either way, you can easily redeem short-term liquid notes when you need to send a wire to electronic funds transfer for other forms of investing.
Longer-term three-year, five-year, and ten-year bonds are good for long-term retirement planning or investment planning in general. Cash and cash equivalents (one to three-month treasury bills) should be the smallest class of assets that you have allocated in your retirement portfolio. Once you cross the one-year maturity date threshold, bonds become reclassified as a long-term, fixed-income investment. Debt-based mutual fund and treasury bonds become part of your portfolio fixed-income allocation. If you choose to take advantage of the higher-yielding Treasury bonds in the current market climate by investing more heavily, you can reduce your treasury bond position in the future when yields begin to normalize again.
As you know, so much of life in retirement depends on your monthly cash needs. You want a budget during retirement that you can comfortably live on. Before you begin making new investments after you retire, it’s important to think about when you plan to retire. People are now commonly working until their seventies and later. If you’re retiring at 70, you probably don’t need to be investing in alternative assets such as hedge funds or even equities with a history of volatile returns. It just isn’t practical when you want to enjoy your golden years.
If you are comfortably retired, consider investing in government bonds with shorter-term maturities when you want to put your disposable cash to work. Be sure it isn’t part of your monthly budget or funds you might need for an emergency. Fixed-year bonds and shorter are ideal. Allow the instrument to mature and then decide what you want to do with the proceeds once you redeem.
Conservative first-time investors who are not sure how they want to invest and want a predictable plan for working to retirement age could consider government bonds with five-year, ten-year, and maybe even twenty-year maturity dates. If you are working with a financial advisor, you will find that they can offer several approaches to reaching retirement age successfully.
Individuals who are established in their careers can use different treasury bonds advantageously throughout their retirement portfolio, and the same holds for new or first-time investors. You can always redeem your bonds before they mature and reallocate those funds into ETFs, mutual funds, or target-date funds. With so many investment products and ads all around, it’s tough to know how much investing in government bonds will help your retirement portfolio, but consulting with a qualified wealth manager can help you decide on the best approach to take right now.
Government bonds are important to explore for your financial portfolio, and the wealth managers at SD Mayer can help you make the smartest decisions possible, whether you’re retired or are just getting started with your career. Contact us to talk to an experienced financial advisor today.