In 2023, I couldn't help but shovel more money into Treasury bonds. With 3-month-to-2-year Treasury bonds yielding 5%+, I felt like the guaranteed return was too high to pass up with about half of my new free cash flow.
But the more Treasury bonds I bought, the more I wondered whether I would regret the decision a year from now. Perhaps you are starting to wonder the same thing. The S&P 500 has performed well since Treasury bonds were yielding over 5%.
Back during the 2008 global financial crisis, I ended up buying some 5-year CDs yielding 4.25%. At the time, I also thought those were fantastic rates, especially as the stock market was falling apart. However, investing in the S&P 500 would have been a much better investment.
For background, I’ve been investing for over 30 years, worked in finance for 13 years, and retired in 2012 due to having enough passive income to cover my living expenses. I started Financial Samurai in 2009 three years after getting my MBA from Berkeley and have written over 2,500 articles.
Ultimately, I don't think you'll regret buying Treasury bonds with your low-risk allocation of capital. A 5% yield is 1% higher than the 4% Rule, which suggests retirees can withdrawal funds at a 4% total return and still not run out of money after 30 years. That's a comforting feeling.
The Risk Of Buying Risk-Free Treasury Bonds Today
Let's first go through the downsides of buying Treasury bonds with a 5%+ guaranteed return. You can buy Treasury bonds from Treasury Direct or through any online brokerage. Below is a sample bond yield chart when Treasury bond yields were over 5%.
1) Reduced liquidity
In order to get your guaranteed Treasury bond return, you have to hold the bonds until maturity. If you don't, you may have to sell at a discount if rates stay flat or go up. The discount ultimately gets translated into having to pay more for the item you're looking to buy.
Most online brokerage accounts are automatically offering higher cash yields on uninvested cash. For example, Fidelity is offering 4.11%.
2) Missing out on potentially higher returns
The money you used to buy Treasury bonds could have been invested in other higher-performing investments. A 5% guaranteed return sounds good but is ~5% below the historical annual return of the S&P 500.
Besides using the money to invest in stocks, real estate, venture capital, and other private investments, you could also use the money to invest in your own business. Private business returns can often be much greater if things start working.
If you don't already have the appropriate net worth asset allocation in risk assets, then you may regret buying Treasury bonds, even with their current high yields.
3) Have to pay taxes
If you invest in Treasury bonds, you will receive a 1099-INT form from the Department of Treasury. You will have to pay your marginal federal income tax rate on the income. Thankfully, you will not have to pay state or local taxes on the income.
If you buy a Treasury bond at a discounted price and then sell it at a premium price, that profit will be taxable as a capital gain. Therefore, the higher your ordinary income, the higher your Treasury bond tax rate.
Why I Won't Regret Buying Treasury Bonds Yielding 5%+
Now that I've discussed the main downsides of buying Treasury bonds, let me share why I'm happy to accumulate more Treasury bonds. Perhaps some of the reasons will help support your reasons as well.
1) A 5% return is higher than our safe withdrawal rate
Our safe withdrawal rate is currently 0%. It is 0% because we can live 100% off our online income. All investment income gets 100% reinvested. If you are working your safe withdrawal rate is 0% too!
If we had no online income, as retirees, our safe withdrawal rate would be between 2% – 3% to cover all our desired living expenses. Therefore, any return about 3% – 4% after taxes is enough to buy us another year of living expenses.
2) There's no upcoming big ticket item we want to buy
Although I keep on dreaming of buying a nicer house, realistically we aren't going to buy another house after buying our current one in 2020. Moving is too much of a pain.
We also aren't going to buy a new car for at least another three years. When the time comes, maybe we'll lease a new car as a company expense. With 40,500 miles on our current car, it hopefully still has many more years left to go before it becomes a money pit.
Finally, we have superfunded, and then some, both of our children's 529 plans. All other expenses can comfortably be covered through investment income or online income.
3) We're happy with what we have
Another way of saying there's nothing big we want to buy is that we're happy with what we have.
We have no desire for fancy clothes, jewelry, or watches. My watch collecting and dealing days are over.
Taking international luxury vacations is out of the cards for the next five years since our kids are still too young to appreciate or remember their trips.
We also don't have any reckless addictions like gambling, drugs, alcohol, or other vices that could set us back. I've been watching more high-stakes poker online recently and some players lose lots of money quick!
Here's a killer poker hand showing how one man lost $1 million of real money. Although the winner wins the biggest pot in live poker history, he ends up only finishing up ~$150,000 for the day.
4) Treasury bonds provide free living for most mortgage holders
80%+ of existing mortgages have rates under 5%.
A 5.5% return pays for our 2.125% primary mortgage rate and then some. Whenever you can earn a greater risk-free rate of return than your mortgage rate, you should take full advantage.
Psychologically, it feels like we are living for free every time we buy another slug of Treasury bonds. Given we continue to pay our mortgage on a monthly basis, it feels like we are double winning by paying down principal plus living for free.
Eventually, we'll pay off the mortgage. When that time comes, we will hopefully look back and marvel at how cheap homeownership really was. We'll also have a valuable asset that can either be sold or provide us with rent-free living.
5) I'm in decumulation mode
Earning anything above 0% adds to our net worth. However, I decided to enter decumulation mode in 2022 at the age of 45 because I don't want to die with too much. We hit our net worth targets for our age and do not want to pay a death tax rate of 40% on remaining assets.
Hence, I don't feel it's necessary to take excess risks to earn a greater return than the risk-free rate. In fact, despite inflation, I feel blessed to be able to return 5% risk-free on our money after years of earning 1% or less.
Making 1% or less on cash felt terrible. However, making 5%+ on cash feels incredible. We have a difficult time spending all our investment income as it is.
In October 2023, I decumulated further and bought a new forever home. That sucked out a lot of liquidity and left me living paycheck-to-paycheck for six months. However, after a $105,000+ capital distribution from a 7-year private real estate investment, I'm liquid again!
6) We've experienced enough stress and anxiety since 2020
Life wouldn't have been too difficult if we didn't have young kids during the pandemic. But having a pandemic baby and a toddler from 2020-2022 has given us tremendous mental fatigue.
When risk assets were appreciating in value in 2020 and 2021, the pandemic was more tolerable. But then to lose all of 2021's gains in 2022 stunk. Thankfully, life also went back to normal by the second half of 2022.
I'm happy to eliminate some investment stress for the next year as we mentally recuperate. We already have plenty of risk asset exposure with our existing investments. Hence, we don't feel the need to add more exposure.
It feels great knowing that any money we save will be there plus five percent a year from now. It didn't feel good to work for free in 2022 (no net worth growth).
7) 5% Treasury bond yields won't last forever
When the Fed gets done hiking rates by the end of 2023, the clock will start ticking as to when the Fed will start lowering rates again. By end-2024, the Fed will begin to cut again. If they do, Treasury bill rates (one year during or less) will begin to decline.
Hence, my strategy is to buy as many one-year Treasury bonds as I can during the month I think the Fed will start cutting rates. This way, I'll lock in the highest risk-free return for the longest duration of time.
Buying Treasury bonds when yields are at the highest level since 2007 seems like a good bet to me. If and when yields fall, your existing bonds become more valuable.
Then as Treasury bond yields decline, so will mortgage rates. As mortgage rates decline, the demand for real estate will rebound. Hence, the key is to try to invest in real estate right before rates start declining.
With real estate prices already down between 5% – 15%, I continue to dollar-cost average into public REITs and private real estate funds like Fundrise, which outperformed in 2022. As mortgage rates decline, the demand for real estate will increase. Those with a lot of cash are taking advantage of deals right now.
8) Less burden on what to do with excess cash
If you spend less than you make, you will accumulate excess cash. If you accumulate too much excess cash, it will start burning a hole in your pocket. The growing burden can be discomforting.
By parking your excess cash in short-duration Treasury bonds, you not only eliminate the discomfort, but you also earn a nominal return. With one less thing to worry about, you can spend more time doing something else more enjoyable.
Thankfully, money market rates with online brokerages have also risen so any idle cash automatically benefits.
9) A decent chance Treasury bonds will outperform stocks and real estate
The final reason why you will likely not regret buying Treasury bonds is because they could outperform stocks, real estate, and other risk assets over the next 12 months. You never know!
I'd rather benefit from higher rates than only let higher rates punish my investments.
Here's how I'd invest $250,000 now. Higher Treasury bond yields make investing in risk assets less attractive and vice versa.
Owning Treasury Bonds Gives Me Peace Of Mind
Imagine if you had $20 million. At a 5% risk-free return, you would earn $1 million guaranteed. Wouldn't you take that all day long? I would.
I know most of us don't have $20 million to invest. It's just a good thought exercise to consider when deciding on where to invest.
If I felt strongly the S&P 500 or real estate had a 10% or greater upside from here, I'd buy fewer Treasury bonds. However, it's hard to see the S&P 500 break past 5,500 in 2024.
Therefore, I don't mind earning 5% while we get through an earnings slowdown, more Fed rate hikes, and a potential recession. I think there's a 80% chance we enter another medium recession by 2025.
If risk assets do take off, then great! My existing portfolio will benefit and my Treasury bonds will still earn a 5% return. If risk assets sell off again, then at least my Treasury bonds will outperform.
I'll be buying more stocks if the S&P 500 gets below 4,200 again. And whenever I see 10% or greater corrections in public or private real estate deals that fit my portfolio, I'll buy.
In the meantime, most of my cash is going toward Treasury bonds and my capital calls for my various private investments.
Reader Questions And Suggestions
What are some other downsides of buying Treasury bonds yielding 5% that you can think of? Do you think you'll regret buying Treasury bonds in the future? If so, why?
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Treasury Bond Invest Alternative
One of the best times to buy real estate is when mortgage rates are high and demand is low. In this scenario, you can find better deals as a buyer with better terms. When mortgage rates eventually decline, it will unleash a tremendous amount of pent-up real estate demand to boost prices.
Check out Fundrise, my favorite vertically integrated real estate manager. Fundrise offers multiple private funds that predominantly invests in residential and industrial real estate in the Sunbelt region. The Sunbelt region has lower valuations and higher net yields. The investment minimum is only $10.
In addition, one of the most interesting funds I'm allocating new capital toward is Fundrise Venture. It invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 75% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. The investment minimum is also only $10, as Fundrise has democratized access to venture capital as well. Most venture capital funds have a $200,000+ minimum.
Financial Samurai is an investor in Fundrise and Fundrise is a long-term sponsor of Financial Samurai. I feel in 20 years, I will regret not investing in AI near the beginning. As a result, I'm building $500,000 in AI exposure today.
Financial Samurai is one of the largest independently-owned and trusted personal finance sites that started in 2009. Why You Won't Regret Buying Treasury Bonds With A 5%+ Yield is a Financial Samurai original post.
TreasuryDirect.com or your brokerage.
Where can I buy I-Bonds?
Here you go: https://www.financialsamurai.com/i-bond-returns/
Thanks for all your hard work. I found a high yield savings account with an APY of 5.05. Would you recommend a bond over a HYSA at the same rate? Does it compound faster? Thanks.
No problem. The key is the tax rate. Treasury bond owners don’t pay state and local income taxes. Hence, you have to do the math.
I bought maximum I-Bonds I could last year for myself and wife. Then also a multitude of laddered CDs via a bank, and now a large sum earning 4.15% at RobinHood. Not to mention the dividend payers, (sending me money to reinvest like some long lost uncle).
I may look again at I-Bonds, or ladder in again on some 3-18 months certificates. Plus pick over the higher yielding profitable stocks.
This year is the first time I’ve ever bought Treasury bonds (age 36 now).
I have too much cash / equivalents for a variety of reasons right now and started laddering them to be able to reinvest with what I expect will be slightly higher rates soon or as better investment opportunities may come along. This gives me all the more confidence I’m making a decent decision.
What are your thoughts on durations longer than 1 year?
Hi Sam,
What’s your opinion on short-term treasury etfs? I’m located in Canada with some USD and looking to gain exposure. I don’t believe I can buy the bonds directly. E.g. XONE
Thanks,
Riada
The risk is principal loss if rates go higher as they have been, and you have to sell.
Better buying today than last year. But I suspect rates will continue going up until about end May 2023. But nobody knows for sure.
I wouldn’t trust the money market accounts. Ultra short term Treasury bonds are a better bet. Point being that you don’t know what is in the money market and with a possible recession on the horizon you could end up losing in a money market account. Also consider I-BONDS, currently at 6.89%, max 10K per person but still a great value.
You mentioned that bonds pay a higher amount that your mortgage. Can you elaborate on this? Are you suggesting that if you have the cash to pay for your mortgage, then you should buy bonds and use the interest from bonds for your mortgage payment? Maybe I’m not understanding this statement.
Yes, I’d rather buy 5%+ yielding Treasury bonds than pay down my 2.125% and 2.375% mortgages at this moment.
You could certainly use the bond interest to pay your mortgage or do whatever you want.
First time I’ve ever bought individual bonds.
This morning in about three minutes (it took longer for the computer to boot) I bought six and twelve month treasuries on Vanguard @ ~5.2%.
The money market there is yielding a nice 4.6% as well.
So the treasuries lock in my rate at 60 basis points higher. I also get 50 more because I don’t have to pay CA state tax on treasuries where I do on money market (10% estimated tax rate). Total 110 basis points for three minutes work. That is the highest I have ever been paid.
Note this is only for a portion of our investments, and I am keeping some funds in money markets to seek alpha when appropriate.
Sam, I get what you have been saying about buying peace of mind via T-Bills. One thing you said that I don’t understand and would like to understand is: “1) Cash yields for online banks or brokerage accounts are currently yielding between 4.1% – 4.5%. Therefore, receiving a 5%+ Treasury yield isn’t as attractive as it might seem. You must calculate the difference between the Treasury yield and the automatic cash yield to ascertain the true benefit. Just make sure you automatically receive the cash yield and don’t have to manually buy a money market fund. Earning an extra 0.5% – 0.9%+ a year is still worth it by just clicking buttons. If you were a bank, such a Net Interest Margin is huge. Think like a bank, not like a lazy consumer.”
Please clarify and be specific about what you meant by “make sure you automatically receive the cash yield and don’t have to manually buy a money market fund.”
Sure. Call your bank or online brokerage and ask what happens to your idle cash and what rate does it get.
I have always considered property to be my bonds. Sam, you own rental property, is it a bond? A stack? Or a percentage of both?
80% of my net worth is commercial realestate, 12% stocks, and 8% cash. I have a small ibond position of .05%. I max out federal taxes almost every year.
I’m 60 and will work another 3 years till I am 70% equity in the properties.
I consider properties a Bond Plus type investment, as I’ve written in my book, Buy This, Not That.
More upside. But also more risk.
What do you think of buying 5 or 10 year or 20 year treasuries?
Seems that if inflation expectations come down and rates go down, those bonds could have substantial capital upside. What do you think?
I stopped reading the article when I read “risk free treasuries” How can a bond issued by a corrupt and bankrupt government be risk free?
Agree, if we do have a recession or even if we don’t … when the fed cuts 10y yields will come down front the currrent 4 handle.
When you say if the s&p gets below 3900 what is this number you are mentioning, where do you look for it?
https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC
There is a good chance the return on your bonds won’t keep up with inflation. Russell Napier jokingly refers to financial repression as government stealing money from old people slowly. He believes they will intentionally keep inflation structurally higher than the risk-free rate of return for the next decade or so in order to bring the ratio of debt/GDP down to a more sustainable level.
Sam, are you buying iBonds again this year?
Already bought. Thoughts on the best, tax-efficient income to earn?
US defaulting on its debt is potentially another worry, isn’t? Although the possibility is extremely slim. I have been buying 3m and 6m T-bills with maturity dates up to early June (the projected default date), but I am hesitant to pull the trigger one more buying now. What are your thoughts on that?
I don’t think you have to worry about a US default hurting the value of your treasury bonds.
You should be worried about default on any instrument issued by a bankrupt and corrupt government. Buy short term investment grade corporates instead.
They’ll do a soft default via inflation. Bondholders will be paid back in dollars that have less purchasing power than the dollars they invested.
Great post. I’m grappling with personal asset allocation issues given I’ve always been an “equity guy,” but fixed income yields are attractive – in nominal terms at least. I’m 42, live in an emerging market and have $2.4m of investable assets, of which ~$400k is not liquid (private equity / VC). The public portfolio is largely US stocks. My household living costs are ~$85k per annum, or 4% of the liquid portion of my portfolio. I’d ideally like to work until 50. My logic is that I can afford to be 100% allocated to equity at this point. How would you be positioned from an asset allocation perspective in this scenario?
My best answer is to make your quantify your risk tolerance by translating losses into lost time.
See: https://www.financialsamurai.com/seer-quantify-risk-tolerance-determine-appropriate-equity-exposure/
I own zero long equity positions and 5% in short ETF’s like DOG and SH. Does that answer your question?
I align with the thinking here and generally feel like I need to prioritize bonds as a higher percentage of my asset allocation. I have two questions, first, given I agree rates won’t stay high forever, does it make sense to lock in rates for longer terms? Rates are a bit lower, but I’m inclined to think 4.5% for 5 years is more attractive to me right now than 5% for 12-18 months. Second, any reason not to look at cds as interchangeable with bonds? I’m still working and don’t need liquidity, so have been looking to cd rates as well as bonds.
Yes, once interest-rate starts going down, all existing bonds from various generations, become more attractive / valuable. The question is the timing of the interest rate decline.
To decide on CDs versus Treasuries, just calculate the after-tax net yield.
Interest rates on bonds are NOT going down and equities are NOT going up -for a long – long time.
Sam, Love your content! Can you write an article on Muni bonds? What are some recommendations for top quality Muni bonds and how to buy them? .Are they generating over 6% returns now?
Maybe! On vacation now I’m trying to do less this year.
See: https://www.financialsamurai.com/the-allure-of-zero-coupon-municipal-bonds/
Sam, any thoughts on why credit spreads are so thin right now?
Which spreads in particular?
I agree with most of this post. But is there any particular reason for focusing on buying individual bonds, rather than on buying shares in a bond mutual fund or ETF?
One difference of course is that if you hold an individual bond to maturity, it pays exactly what you expect it to. But with a bond fund, the share price can go up or down on a daily basis (usually in the opposite direction of interest rates). So maybe that difference is where you’re coming from — though that difference isn’t necessarily an advantage for one side or the other. It depends on what your priorities are, and on which direction interest rates move in the future.
I would rather invest in a short-term bond fund because it’s more liquid, and because I think interest rates are more likely to stay the same or go down over the next year or two than to go up significantly. But I also realize that I could be wrong and could get burned if rates continue to go up at a rapid pace.
There are no liquidity issues with US Treasury bonds. Other types of bonds that liquidity can be a fair concern but not with US Treasuries (especially short term ones).
Buy short term investment grade corporates rather that bonds issued by a corrupt and bankrupt government.
If you buy a bond fund, there is no maturity date. You face principal risk.
I don’t plan to buy Treasury bonds this year. I think it’s better to buy stocks while it’s down.
We aren’t in decumulation mode yet. Maybe in a few years, I’d feel better about buying more bonds.
I’m doing both – stocks are trading at ~19x forward earnings (assuming forward earnings don’t come down further), which is ~3x above historical average, so hard to argue stocks are cheap here. My retirement account $ is largely going all bonds but non-retirement money is going largely to short term Treasuries (15 months or less) and may start nibbling on medium term ones this summer
Joe, do you think if your wife wasn’t working and bringing a high income, you would still invest all in stocks?
In such a situation, you become a true retiree, not a stay at home spouse with a working spouse.
Your risk profile is different.
I can’t speak for Joe but I am retired and my wife still works. We have kept good records of our expenses and have a pretty good handle on how much we will need when she joins me in retirement and her active income/benefits go away. With that in mind, we have created enough passive income streams to cover our projected expenses when we are both in retirement and are able to keep the majority of our investment portfolio growing in risk assets.
My advice would be that you invest based on your projected needs and any gaps should be covered by other, less risky sources that are not in your equity portfolio.
I remember when I was a teenager in the mid-80s I was getting 12% on a money market fund my dad bought for me. Take that!
Given you were a teenager in the mid-80s, I hope you are extremely rich now with 40 years of saving and investing!
Being a teenager, I probably spent the money on stupid things….a bike, moped and all those Duran Duran wanna be clothes. At 55 now, I am doing just fine with my financial situation and teaching my 20 year old daughter not to do what I did.
Hah! I enjoyed those Lollapalooza Days.
Glad you’ve benefitted from the power of compounding!
yes – and inflation was at least that rate or higher.
For someone living in Washington state (has no state tax), would you recommend buying Treasury or CD?
Just have to calculate your after tax yield when comparing to decide what’s best.
My advice would be to move to Texas or Florida.
It’s the safe withdrawal rate supposed to be inflation adjusted? So 5% return isn’t necessarily higher than a safe withdrawal rate.
It’s not. Feel free to elaborate what you mean with an example and what withdrawal rate you’re using and why. Thanks.