The Superiority of Treasuries in Fixed Income Investing
Fixed income investments have long been a staple in the portfolios of investors seeking stability and income generation. Among the various fixed income options available, U.S. Treasuries have often stood out as a superior choice when compared to Certificates of Deposit (CDs) and Money Market Accounts (MMAs). In this article, we will explore the reasons why Treasuries with yields equal to CDs or MMAs are far superior choices for investors looking to optimize their fixed income investments.
Safety and Security
U.S. Treasuries are considered one of the safest investments available in the market. Backed by the full faith and credit of the U.S. government, they are virtually free of default risk. This level of safety surpasses that of CDs and MMAs, as they may be offered by banks or financial institutions that are subject to varying degrees of financial stability. Even though CDs are often insured up to a certain limit by the Federal Deposit Insurance Corporation (FDIC), there is still some risk involved if the bank itself encounters financial trouble, as we saw with Silicon Valley Bank earlier in 2023.
Treasuries are highly liquid investments, traded in deep and well-established markets. This liquidity ensures that investors can buy or sell them with ease, often at or near market prices. CDs and MMAs, on the other hand, might have restrictions on withdrawals or require advance notice for large withdrawals. This lack of liquidity can be a disadvantage, especially in times when you need access to your funds quickly.
Recently, the yield on Treasuries has exceeded that of CDs and MMAs, making them an attractive option for income-seeking investors. While Treasuries might not always provide the highest returns in the fixed income market, their combination of safety and yield often makes them a superior choice for many investors.
In a well-balanced investment portfolio, diversification is key to managing risk. Including U.S. Treasuries can be an effective way to diversify a portfolio because they tend to have low or negative correlations with other asset classes like equities. CDs and MMAs, on the other hand, do not provide the same level of diversification benefits as Treasuries, as they are typically closely tied to interest rates and may not provide the same degree of safety.
Interest income from U.S. Treasuries is exempt from state and local taxes, providing an additional advantage for investors in high-tax areas. CDs and MMAs may be subject to state and local taxes, depending on the specific circumstances and jurisdiction. This tax advantage can make Treasuries an even more attractive option for certain investors.
Investing in U.S. Treasuries has become increasingly accessible to individual investors through various channels, including online brokers and the U.S. Treasury's website. This ease of access allows investors to build a diversified fixed income portfolio with Treasuries of varying maturities to match their specific investment goals and risk tolerance. CDs and MMAs may have more limitations on accessibility, depending on the institution offering them.
While Certificates of Deposit and Money Market Accounts have their merits as fixed income investments, U.S. Treasuries often emerge as the superior choice for investors looking to maximize safety, liquidity, yield, diversification, and tax advantages. Treasuries provide a compelling combination of these attributes, making them an attractive option for those seeking stability and income generation in their investment portfolios. It's important for investors to carefully consider their financial goals and risk tolerance when selecting fixed income investments, but Treasuries should certainly be a top contender in the decision-making process.