Investors are investing money in US bonds due to negative interest rates around the world and are concerned that the new coronavirus will harm the economy and businesses.
For example, the share price of the Vanguard Extended Duration Treasury ETF
EDV,
is up 19% this year. The average effective maturity of the exchange traded fund is 25.1 years, which means that it has a relatively high yield of 2.13%. But he is particularly sensitive to the direction of interest rates.
Investors who seek the least risk can avoid stock price fluctuations by purchasing their own treasury securities at no cost or commission. See more on this below.
US rates could fall further
In a world with around $ 14 trillion in negative yielding debt, U.S. treasury yields are relatively high, even if the yield on 10-year treasury bills
TMUBMUSD10Y,
continues to reach historic lows. On Thursday, the yield fell to 0.93% against 1.92% at the end of December.
Here is a graph showing the evolution of prices over the past year for EDV:
Investors outside the United States looking for security and any kind of return can continue to buy so much US debt that interest rates fall even lower. It is even possible, if the coronavirus epidemic does not resolve quickly, or if the economic figures show a sharp drop in the GDP growth rate, the Federal Reserve could follow most of the other developed countries in the negative for rates short-term interest. The Fed, in a surprise move, cut its benchmark rate by 50 basis points on March 3.
TMUBMUSD10Y,
Why buy yours?
The 2.13% Vanguard Extended Duration Treasury ETF is attractive – especially if you are looking to invest in very low credit risk debt securities and you think interest rates will likely remain low or even decline further .
Like any exchange traded fund or mutual fund, EDF has a fluctuating market price. It evolves as a function of bond market demand and interest rates, following the inverse relationship between the two: if interest rates fall, bond prices rise, so that buyers will receive the prevailing yields, all other things being equal – what they are when you are dealing with an issuer with a high credit rating.
If you opt for higher yields with corporate bonds or stocks, you run additional credit risk and various operational risks for the companies of the issuers.
But what about this price fluctuation? If you buy a short-term bond fund, it will be less sensitive to changes in interest rates – its share price will be less volatile. For example, the iShares 7-10 Year Treasury Bond ETF
IEF,
has a SEC return of 1.22%, net of annual expenses of 0.15% and a four-star rating from Morningstar. Its stock price has increased by 14% in the past year and by 7% this year. Below, the iShares 3-7 Year Treasury Bond ETF
IEI,
has a SEC return of 1.12%, with expenses of 0.15% and also a four-star Morningstar rating. The IEI share price has increased by 5% in the past year and by 4% in 2020.
If you think interest rates are even lower, a treasury bond fund or an ETF can still be a great investment for you.
But what if you want to get away from the fluctuating prices entirely? Buying your own newly issued Treasury securities can be the safest way to keep a significant amount of capital while earning a decent return, at least for now, unless you can park all your money in the banks while making sure that all the money is covered by FDIC insurance and be satisfied with the returns.
If you buy individual bonds, you no longer have a fund which calculates a net asset value (the closing market value on that day for the investments of a fund divided by the number of shares in circulation), or which does not look at the share price of an ETF, which may have its own discount or premium to net asset value. You can keep your individual bond until maturity without worrying about market fluctuations.
And that’s the rub – can you really hold it to maturity? Assuming you can, with part of your portfolio, you never have to worry about market price fluctuations. But you will have to think about the price you pay during the initial purchase.
When a bond is issued, it is sold at face value, or at par, and its declared interest rate is called a coupon. Once this bond is listed on the stock exchange, its market price fluctuates. If the price goes up, the yield (the coupon divided by the price) goes down, and vice versa. If you pay a premium (above par) for a bond and keep it until maturity, you will record a capital loss at maturity, but you will know the amount of the loss before buying. The yield to maturity of a bond increases the premium or discount on purchase.
All of this can be simplified if you buy US Treasury bonds because they are auctioned.
How to do
Here is the provisional auction schedule for the US Treasury. The 3-year, 10-year and 30-year bond auctions are usually held quarterly, but the current schedule includes longer-term (except 30-year) paper auctions every month . There are weekly auctions for shorter durations. Here is a more detailed schedule for this week and next week.
If you have a brokerage account, it is likely that your broker can help you participate in a free auction. Your broker may also charge a small fee. Most do not.
If you do not have a brokerage account or prefer to buy treasury bills directly, you must register and create a TreasuryDirect account.
Once you are set up through your broker or TreasuryDirect, you can participate in auctions to buy your own securities. A competitive offer means that you specify the interest rate, yield or discount margin (for treasury bills) that is right for you. A non-competitive auction means that you are guaranteed to buy the amount of treasury paper from the maturity you select at whatever interest rate is auctioned.
Treasury bills and bonds bear interest twice a year, on a par and coupon basis. Treasury bills are issued at par, so that interest is paid when due.
Do not miss:These stocks may be your best choice for income as interest rates continue to fall
Investors are investing money in US bonds due to negative interest rates around the world and are concerned that the new coronavirus will harm the economy and businesses.
For example, the share price of the Vanguard Extended Duration Treasury ETF
EDV,
is up 19% this year. The average effective maturity of the exchange traded fund is 25.1 years, which means that it has a relatively high yield of 2.13%. But he is particularly sensitive to the direction of interest rates.
Investors who seek the least risk can avoid stock price fluctuations by purchasing their own treasury securities at no cost or commission. See more on this below.
US rates could fall further
In a world with around $ 14 trillion in negative yielding debt, U.S. treasury yields are relatively high, even if the yield on 10-year treasury bills
TMUBMUSD10Y,
continues to reach historic lows. On Thursday, the yield fell to 0.93% against 1.92% at the end of December.
Here is a graph showing the evolution of prices over the past year for EDV:
Investors outside the United States looking for security and any kind of return can continue to buy so much US debt that interest rates fall even lower. It is even possible, if the coronavirus epidemic does not resolve quickly, or if the economic figures show a sharp drop in the GDP growth rate, the Federal Reserve could follow most of the other developed countries in the negative for rates short-term interest. The Fed, in a surprise move, cut its benchmark rate by 50 basis points on March 3.
TMUBMUSD10Y,
Why buy yours?
The 2.13% Vanguard Extended Duration Treasury ETF is attractive – especially if you are looking to invest in very low credit risk debt securities and you think interest rates will likely remain low or even decline further .
Like any exchange traded fund or mutual fund, EDF has a fluctuating market price. It evolves as a function of bond market demand and interest rates, following the inverse relationship between the two: if interest rates fall, bond prices rise, so that buyers will receive the prevailing yields, all other things being equal – what they are when you are dealing with an issuer with a high credit rating.
If you opt for higher yields with corporate bonds or stocks, you run additional credit risk and various operational risks for the companies of the issuers.
But what about this price fluctuation? If you buy a short-term bond fund, it will be less sensitive to changes in interest rates – its share price will be less volatile. For example, the iShares 7-10 Year Treasury Bond ETF
IEF,
has a SEC return of 1.22%, net of annual expenses of 0.15% and a four-star rating from Morningstar. Its stock price has increased by 14% in the past year and by 7% this year. Below, the iShares 3-7 Year Treasury Bond ETF
IEI,
has a SEC return of 1.12%, with expenses of 0.15% and also a four-star Morningstar rating. The IEI share price has increased by 5% in the past year and by 4% in 2020.
If you think interest rates are even lower, a treasury bond fund or an ETF can still be a great investment for you.
But what if you want to get away from the fluctuating prices entirely? Buying your own newly issued Treasury securities can be the safest way to keep a significant amount of capital while earning a decent return, at least for now, unless you can park all your money in the banks while making sure that all the money is covered by FDIC insurance and be satisfied with the returns.
If you buy individual bonds, you no longer have a fund which calculates a net asset value (the closing market value on that day for the investments of a fund divided by the number of shares in circulation), or which does not look at the share price of an ETF, which may have its own discount or premium to net asset value. You can keep your individual bond until maturity without worrying about market fluctuations.
And that’s the rub – can you really hold it to maturity? Assuming you can, with part of your portfolio, you never have to worry about market price fluctuations. But you will have to think about the price you pay during the initial purchase.
When a bond is issued, it is sold at face value, or at par, and its declared interest rate is called a coupon. Once this bond is listed on the stock exchange, its market price fluctuates. If the price goes up, the yield (the coupon divided by the price) goes down, and vice versa. If you pay a premium (above par) for a bond and keep it until maturity, you will record a capital loss at maturity, but you will know the amount of the loss before buying. The yield to maturity of a bond increases the premium or discount on purchase.
All of this can be simplified if you buy US Treasury bonds because they are auctioned.
How to do
Here is the provisional auction schedule for the US Treasury. The 3-year, 10-year and 30-year bond auctions are usually held quarterly, but the current schedule includes longer-term (except 30-year) paper auctions every month . There are weekly auctions for shorter durations. Here is a more detailed schedule for this week and next week.
If you have a brokerage account, it is likely that your broker can help you participate in a free auction. Your broker may also charge a small fee. Most do not.
If you do not have a brokerage account or prefer to buy treasury bills directly, you must register and create a TreasuryDirect account.
Once you are set up through your broker or TreasuryDirect, you can participate in auctions to buy your own securities. A competitive offer means that you specify the interest rate, yield or discount margin (for treasury bills) that is right for you. A non-competitive auction means that you are guaranteed to buy the amount of treasury paper from the maturity you select at whatever interest rate is auctioned.
Treasury bills and bonds bear interest twice a year, on a par and coupon basis. Treasury bills are issued at par, so that interest is paid when due.
Do not miss:These stocks may be your best choice for income as interest rates continue to fall