Treasuries vs. Bond Funds
Why we prefer individual Treasuries when the goal is safety and predictability.
What This Means
The biggest difference between an individual U.S. Treasury and a bond fund comes down to certainty.
With an individual Treasury, we know the interest rate, the maturity date, and when the face value is due back. The value of that Treasury can fluctuate before maturity, but if our plan is to hold it until maturity, those price movements may not matter very much to us.
A bond fund is different. It owns a basket of bonds, but the fund itself generally doesn’t have a specific maturity date when you know your original investment is coming back. Its value continually fluctuates, and if you need to sell when the fund is down, you may have to take a loss.
Think about someone planning to buy a house one year from now with $100,000 set aside for the down payment.
You could put that money into a bond fund. But what happens if interest rates move sharply higher and the fund is worth $94,000 when you need the money?
You don’t get to tell the seller you want to wait for your bond fund to recover.
You need the money.
Instead, we could purchase an individual Treasury with a maturity date that lines up with when we expect to need those funds.
And we have a lot of flexibility. Individual Treasuries can be purchased with maturities ranging from just a few weeks in the secondary market all the way out to 30 years. That allows us to match the maturity of the investment to the goal.
That’s the difference.
We aren’t trying to maximize the return on every dollar.
Sometimes the goal is simply to know what we own, what it pays, when it matures, and when our money is due back.
That’s why, for the safe portion of a portfolio, we generally prefer individual U.S. Treasuries over bond funds.
Common Questions
Can you lose money in an individual U.S. Treasury?
Yes, if you sell the Treasury before maturity, its market value may be higher or lower than what you paid.
Interest-rate changes affect Treasury prices just like other bonds.
The difference is that if we purchase a Treasury and hold it until maturity, we aren’t forced to sell simply because its market price moved.
Can you lose money in a bond fund?
Yes. Bond fund prices fluctuate based on interest rates, credit conditions and the securities held inside the fund.
Because most traditional bond funds do not have a single maturity date, there isn’t a specific future date when your original investment is automatically returned to you.
Why do you prefer individual U.S. Treasuries?
Because we want to know the interest, the maturity date and when the principal is due back.
For the safe portion of a portfolio, we value that certainty.
What maturities are available with individual U.S. Treasuries?
U.S. Treasuries give us a lot of flexibility. We can buy a Treasury that matures in just a few weeks by purchasing an already-issued Treasury in the secondary market, or we can go all the way out to 30 years.
That allows us to choose a maturity date based on when we expect to need the money.
Remember This:
The safe part of your portfolio should be safe — know what you’re earning, when it matures, and when your money is due back.