30 Year Treasury Bond

2008 may well be remembered as the year when Treasury Secretary Henry M. Paulson Jr. has stolen the star of the Fed Ben Bernanke. The year when investing in U.S. Treasury seems to be the only safe place to run. "IS YOUR MONEY SAFE? Media sound bite and was the only thing strong enough was the faith and credit of the United States government." The possibility of even the mighty FDIC goes kaput gave nightmares bank runs and failures of CDs. So how exactly is investing in funds? The answer depends on your definition of security and the type of treasure that you buy. As this article shows, there were times when some cash investments have produced significant negative returns.

The U.S. Department of Treasury issues four types of securities and several non-marketable securities. This article will be focusing on the T-Bill, T-Note and T-Bond. All 3 are free of market risk that if you're willing to hold them until maturity. If you buy an individual treasury and sell them before maturity, you run the risk of selling if for less than you paid for it, IE's market risk. A collaborator of market risk is simply the transaction costs of buying and selling. avoiding market risks and transaction costs are two main reasons why you can hold cash investments to maturity instead of jumping in and out.

T-Bill: Almost Risk Free

Safer Security is the T-bill is issued with a maturity of less than 1 year, usually 3 or 6 months. At December 19, 2008, the T-bill yielded 3Mo 0.0% interest. This is far below the long-term average of 3.5%. This clearly illustrates that investors are more concerned about the loss of capital that the rate of return. Of course, the worst return for a one year T-Bills history is 1% which is great news when the principal is the only concern. But T-Bills are not totally free of risk when you consider inflation. This explains why the worst of 1 year, the real return is -8.8% occur in 1941. Figure 1 shows the rate of inflation in the United States from 1914 to 1998 and is included here to give an idea of how inflation can change in a very short period of time. It is important to recognize that 1941 was not the year the inflation rate highest on record, but a year after a period when nobody worried about inflation. Again, T-Bills may be considered relatively safe for your capital, but that does not mean they should be considered safe for you.

Figure 1: Data from the Bureau of Labor Statistics

T-Note and T-Bond: an asset class at risk

Treasures of the most frequently cited are the T-Note and T-Bond and that is where the concept of risk without really breaks down. T-Notes are issued with maturities ranging from 2 to 10 years and T-bonds may be issued with a maturity up to 30 years. As for the T-bill, T-Note and T-Bond does not bear the market risk if you hold them to maturity. But with 10 years and T-note yielding 2.08% and the 30-year T-Bond yielding 2.56%, I wonder how many investors are really capable of planning and holding them until maturity. I bet that most individual investors now hold shares they bought 10 years ago. Most bored or lose faith and change their investments every two years with the risk of market risk, sales of investment loss. Moreover, as time passes, the T-Note and T-Bond will be subject to price pressure. For example, the worst performance for 1 year T-Bond history is a% -9 which took place in 1999. When you include inflation, the worst performance T-Bond was real -15.46% o.