Do US Treasury Bonds Serve a Purpose For Depositors? - 2024

With the recent and pronounced move in the Treasury curve, there has been a lot of discussion in the mainstream financial media suggesting that depositors look to US Treasury bonds.

The simple reality is that short-term US Treasury bonds are designed for corporations, institutions and ultra-high net worth individuals who are trading with increments of $500,000 or more (i.e., would be above the protections of FDIC insurance). For most depositors, US Treasury bonds simply do not represent a viable alternative to savings and money market accounts.

And, it really is not so clear that they represent a good alternative to Certificates of Deposit either.

The financial media is focused on the fact that anyone who bought a long-term Treasury bond in mid to late October - when the 2-year and 3-year rates were over 5% and the 5-year and 10-year were just under 5% - has seen extraordinary appreciation in the value of their bonds over less than 2 months!

This is because interest rates have fallen with 5-year and 10-year Treasury rates now below 4% and the bonds have moved commensurately.

I personally plowed a lot of money into a 5-year US Treasury with a 1.50% coupon that was trading at 84.50 on October 22 and just crossed 89. A 10-year note or anything with still longer duration would have obviously performed still better, but I am quite pleased with these returns, as this represented the most risk that I felt that could take.

The reality is that long-term Treasury bonds are risky. Anyone who locked into long term rates more than two years ago can tell you that they are sitting on (or recognizing) huge losses.  Even in the course of 2023, people who got in before the top in yields in October were getting bruised as billion dollar hedge funds seemed to be conspiring to short the Treasury curve and to create panic over the US government's ability to make due on its obligations (these concerns, of course, are not unfounded and are no less relevant today).

Treasury yields may continue to move down, leading to further appreciation in Treasury bonds, but you are taking that bet if you buy US Treasury bonds, and you may not really want to take that bet if you are an investor or depositor who just wants to lock in yield until maturity. 

And, if you are seeking something that you will hold and that will guarantee a yield to maturity, would you rather get more yield if you can do so in something else even it if is designed to be less liquid?

Quite simply, Certificate of Deposit rates are in a place now where you are going to get more yield. Two weeks ago, Treasury yields fell to a point where even in you are in the highest tax brackets and/or live in high tax states and municipalities who benefit greatly from the state and local tax attributes of Treasury bonds were better off in CDs. Treasury yields, of course, have fallen sill further, and some CD rates have fallen too but you can still lock into great CD rates. (As of the date of this article, the 2-year US Treasury stands at 4.42% and 2-year CDs are yielding as high as 5.25%).

Check current two-year CD rates.

Check current five-year CD rates.

Some depositors - particularly those in New York, Boston, Chicago and California - will insist that they need to be in products that are state and local tax free like Treasurys over the long term.  These depositors may want to consider municipal bonds, which are often federally tax free, and agency notes, particularly notes issued by Federal Home Loan Bank (FHLB) and Federal Farm Credit Bank (FFCB), that have the same tax attributes as Treasury bonds. You can currently buy municipal bonds or long-term agency notes with significant yield premium over comparable duration Treasury bonds, if you can get comfortable with the credit risk (the federal government would make good on a moral obligation to bail out federal agencies if they ever become insolvent). Some munis and agency notes often offer more yield than similar duration Treasuries because they can be called, but by buying only notes that trade at a discount you can avoid the risk in the call feature (in fact, you will get a nice windfall if yields fall so significantly that they are called quickly).

US Treasury bonds are in the news and they are great trading vehicles designed for institutions and ultra-high net worth investors depositing well over the FDIC limits and needing immediate liquidity. Depositors seeking yield over the long term will do better in CDs, municipal bonds and agency bonds.