The cost of living has skyrocketed no matter what statistics you look at, and investors who have money stashed somewhere for when and if they need it, or simply for holding it in reserve for peace of mind, want the highest income they can get, along with the lowest amount of risk.
The fixed-income market is one place where investors can put funds and receive a return on their investment. And it’s huge. The Bank for International Settlements estimates that the U.S. bond market, the largest bond market in the world, is valued at more than $51 trillion.
Treasury securities fit the need for income and safety. The principal and interest on Treasury bills, bonds, and notes are guaranteed by the U. S. Government. This is why Treasuries have the highest quality valuation in the fixed income asset class.
Treasuries are bought and sold electronically, either through a broker or by opening an account at TreasuryDirect.gov. The U.S. Treasury market is about $27 trillion big—a deep, vast market. Factors to consider while finding the right security include maturity date, calculating the yield to maturity, understanding the tax consequences, and other factors.
Yields have moved down recently. In February 2023, Axios Markets reported that an investor could get close to 5% on U.S. Treasuries for the first time since 2007, before the Great Recession. The yields on Treasuries are still attractive, especially at the short end, running around 4.7%, depending on maturity length.
The Treasury market activity does not seem to be slowing down. Coalition Greenwich, a strategic benchmarking firm, reported in September that “A surprise rate hike from the Bank of Japan coupled with continued fiscal policy uncertainty in the United States catalyzed an unusually active August, with the U.S. Treasury market recording its first ever month with an average daily notional volume (ADNV) over $1 trillion—37% higher than August 2023.”
It takes several steps to buy or sell Treasury securities, even if you understand how to navigate that market. Complications are not limited to Treasury securities but are found in other fixed income securities, including bonds. Of course, the market price of publicly traded Treasuries and other income securities, in an Exchange Traded Fund (ETF) structure or as individual securities, will fluctuate, and money can be made or lost.
The New Way to Get Treasury Income Exposure
A recent offering from F/m Investments, an investment firm and ETF provider, makes it possible to receive Treasury securities income through their U.S. Benchmark Series of Treasury ETFs; the series provides exposure to returns from the full range of Treasury bills, bonds, and notes. The shortest-term security is the U.S. 3-month ETF (Symbol: TBIL), and like the other ETFs, is structured to make monthly interest payments; the latest offering yield is 4.78%; the management expense is a reasonable 0.15%.
As the F/m Investments website explains: “The investment objective of the U.S. Treasury 3 Month Bill ETF (the ‘UST 3 Month Bill Fund’) is to seek investment results that correspond (before fees and expenses) generally to the price and yield performance of the ICE BofA US 3-Month Treasury Bill Index (GOO1).”
The Treasuries in the full range of the U.S. Benchmark’s portfolios, from the 3-month Treasury bill to the 30-year Treasury bond ETF (symbol: UTHY), remain in its ETF maturity class until its monthly rebalancing and those funds are then rolled into the next offering of that maturity.
So, what securities should investors buy now to receive U.S. Treasury income? Peter Baden, Portfolio Manager at Genoa Asset Management, a subsidiary of F/m Investments, told Worth, “We have been encouraging folks to lock in these rates for as long as they are comfortable.”
By that, he meant that rates are good now, especially on the short end, but at some point, could go lower. “We’re not entirely sure where the Fed will stop lowering rates, maybe 100, 200 basis points lower than where we are right now.”
Baden said that investors can “extend out on the curve” by buying Treasury returns from the 2-year, 3-year, and 5-year maturity, using the U.S. Benchmark ETF series; by doing this, investors can build themselves effective average-weighted maturity portfolios. If rates do go up in those further-out maturities, then income from the ETFs will increase. “We think there is a great opportunity for folks to offset what might be coming here as the Fed continues this new interest rate regime of lowering rates to support the economy and jobs. This could be an opportunity to mitigate the loss of income on the shorter end.”
Are Bond Funds the Same as Bonds?
Bonds and bond mutual funds are very different. Bonds have maturity dates and bond funds do not, they buy and sell bonds that mature in a stated time frame. Mutual funds constantly buy bonds that fit the fund’s maturity period and sell bonds when they don’t fit the fund’s maturity range anymore. Bond funds—just like individual bonds, stocks, ETFs, and other market-traded securities—have an ongoing market price risk. Which is also a market-price reward potential.
A way to avoid market-price risk is to buy shorter-term bonds. If held to maturity, the principal will be paid by the issuing corporation, if the corporation can pay it. If a corporation cannot, the bonds will go into default. Investors can also spread risk by buying bond ETFs, such as Invesco’s BulletShares, which hold shorter-term bonds.
Investors can lose money holding bonds and other fixed income funds and securities. For instance, the iShares 20-year + Treasury Bond ETF (symbol: TLT) holds Treasury securities that mature in 20 years, or longer. On July 1, 2020, according to Yahoo Finance charts, the security was selling at 171.00; on October 1, 2023, the ETF was selling at 83.58, which is a loss of about 51%. The ETF was paying, if bought in July 2020, less than 1%. So, a buyer buying and holding the ETF would have gotten under 1% and would have lost, using those dates, about half her principal. Of course, a bond fund holder can also make money; if interest rates drop, the market price of the fund climbs.
If an investor had bought the 20-year Treasury Bond, rather than a fund, she could have held it to maturity and received part at that time. Yes, she would have waited a long time to recoup her investment, but she would have gotten her principal back—if the corporation or municipality could pay.
Investors are Buying More Individual Bonds
Bonds and stocks are traded differently. Most of the world-wide bond trading is done in over the markets, and liquidity is mostly offered by the institutional dealers or investment firms. Stocks, however, usually trade on centralized markets. Most major brokerage firms have their own platforms where they trade bonds, but even so, the bond markets are not as uniform as the stock markets.
Institutional and individual (retail) investors in bonds must deal with cusp numbers, maturity dates, tax consequences, call features, and other factors, like when a bond is found, and a buy order is entered, the desired bond may or may not be there, leaving an investor, if she really wanted that bond, frustrated and having to continue looking for a bond she wants or needs.
Retail Bond Demand Is Driving Need for Change
More retail investors are buying individual bonds. A recent report from Coalition Greenwich’s April 2024 report made the point that “Retail investor interest in bonds is at a historic high . . . according to data from the Federal Reserve, U.S. households in Q4 2023 held $5.67 trillion in ‘directly held debt securities’ (aka bonds) and $5.31 trillion in ‘indirectly held debt securities’ (mostly ETFs and mutual funds). That represents an amazing 90% growth in bond holdings since Q4 2021—growth that is even more staggering than that number suggests as it takes into account bonds’ loss of value from the rate hikes.
Conversely, bonds held via funds dropped 1% over the same timeframe, creating the first period since 2014 that U.S. retail investors held more in bonds than bond funds.”
Clearly, change and improvements—and with all the technological advances over the last 20 years or so, the financial industry should be able to supply it—are needed. Well, what kind of change is needed, and what would that improvement look like? Kevin McPartland, Coalition Greenwich’s head of research, told Worth, “Improving the user interface for trading—whether on the browser or in an app—is hugely important. Retail investors and their advisors need modern front-end trading tools that demystify both bond selection and bond trading.”
McPartland went on to explain that, “For those trading tools to work, they must also have fast and reliable access to multiple sources of liquidity. In other words, retail investors should be able to benefit from the growth in electronic trading and automation seen in the institutional market, where bonds can more often be traded as quickly and easily as stock.”
The financial community, never a culture to sit around when there is opportunity, has jumped up to fill this need. The brokers and bankers are upgrading their games, and there are new companies springing up to fill fixed-income investors’ needs.
New Ways to Trade Bonds
One of the newer investment firms is Public.com. Stephen Sikes, Public’s COO, informs us that the firm launched in late 2019, just before COVID-19 started spreading. The internet and other technological advances had changed things, and Public.com had a definite market in mind. “We focused on building the next generation of highly trusted primary investment accounts for self-directed investors who have grown up with the internet and want to do their business exclusively online and exclusively on their phone,” Sikes told Worth.
Investors were invested mostly in equity and other asset classes when Public.com got started. For most of the 14 years before Public.com, interest rates were insignificant.
And now, interest rates are again important, and Public.com has created securities and investment methods to fit today’s needs. Public.com states that it carries 10,000 Treasury and corporate bonds on its bond screener, so customers can trade directly and quickly at one stop. Among its offerings are over a hundred fractional share bonds, which can be bought for $100 or more, in any dollar amount. Usually, bonds trade in $1,000 increments
There are many innovations and improvements on the Public.com website, all to educate and help its users trade in assets, including bonds. Sikes says that when interest rates exploded in 2022, “We saw the biggest opportunity was in the fixed-income world. And the question became, how do we do for fixed income what the industry has done for equities?”
