With U.S. Treasury bond yields zooming higher, the interest in buying Treasury bonds has followed suit. Let me show you how to buy Treasury bonds online. I’ll then share some buying strategies to help maximize returns and liquidity.
Treasury bonds are risk-free investments if you hold them until maturity. You don’t have to pay state or local taxes on Treasury bond income or gains either.
Treasury bonds are issued by the United States federal government to finance projects or day-to-day operations. As inflation and inflation expectations rise and fall, so do Treasury bond yields and vice versa.
Two Ways To Buy Treasury Bonds
The first way to buy treasury bonds is through TreasuryDirect. TreasuryDirect.gov enables you to buy treasury bonds straight from the government each time treasury bonds are issued.
Hopefully, all of you already have a TreasuryDirect.gov account because all of you decided to buy I Bonds in 2021, 2022, and 2023.
Too bad individuals are limited to buying $10,000 a year. As a result, more people are looking to buy Treasury bonds, where purchase amounts are unlimited.
Unfortunately, the TreasuryDirect.gov website is cumbersome. Don’t lose your password or the answers to your security questions. It will take one hour to get a hold of someone to reset your password.
Further, you can only buy treasury bills (one year or less) or treasury bonds whenever the government decides to auction them. And when the bills or bonds are available, you can’t easily see their yields!
Below is a snapshot of what I see when I log on and click BuyDirect and select Bonds. Notice how it is unclear what the yield is for each Product Term, despite the website asking you to input a Purchase Amount.
The second way to buy Treasury bonds is through an online brokerage account like Fidelity, Charles Schwab, or E*Trade. You pay a nominal fee by receiving a lower bond yield (3-5 basis points). But it may be much easier with a lot more variety for most investors.
Given I use the Fidelity platform, I’ll show you how to buy treasury bonds using this platform. However, all the online brokerage accounts are similar. Online brokerage accounts are marketplaces for buying and selling already issued Treasury bonds.
How To Buy U.S. Treasury Bonds On Fidelity
Step 1: Once you’ve opened up an investment account on Fidelity, go to News & Research. Then click Fixed Income, Bonds & CDs in the dropdown menu.
Step 2: You will see a chart that shows all types of bonds based on duration. I’ve highlighted the U.S. Treasury row in a red box. In the image, the U.S. Treasury yields range from 4.15% for a 3-month treasury bill (was 3.5% in September 2022) to 4.15% on a 30-year Treasury bond. The sweet spot is buying a one, two, or three-year Treasury bond for 4.5%+.
Once you’ve selected the type of bond and duration you would like to buy, click the yield link. Please note these rates change multiple times a day.
Step 3: You’ll now see various bonds on the Fidelity secondary market to choose from. Below is a list based on me clicking 4.23% for a 1-year Treasury bond. 1-year Treasury bonds are now over 5%.
You mainly want to choose to buy the bond with the highest Yield. The Maturity Date will all be similar, but they can range by up to two months. Remember, you won’t be getting back the par value ($100/share) until that Maturity Date.
Why are there so many types to choose from? Again, online brokerage accounts are a marketplace for existing treasury bonds in this example. Further, not all the treasury bonds under a specific maturity date were issued at the same time. This is why you see different Coupon payments and bond prices.
Example Of A Bond Term Sheet
When you click on one of the many bond offerings, a term sheet like the one below will appear. Although this bond term appears under the 9-month Treasury bond duration, it was actually issued on 7/02/2018 with a coupon of 2.625%. In other words, the bond qualifies since it only has about nine months left until maturity.
The buyer today of this 5-year Treasury bond that expires on 06/30/2023 gets a 2.625% semi-annual coupon payment. Because interest rates have risen, the buyer can buy the bond below par value (below $100) compared to when the bond was first issued by the Treasury on 07/02/2018. The bond needs to value to make its yield to maturity more enticing.
If the buyer at ~$97.20 holds onto the bond until it is redeemed on 06/30/2023, they will receive $100 for each bond they own, receiving an effective yield of ~4.13%. The online brokerage calculates this all for you.
Step 4: The final step to buying treasury bonds is to select an Account to buy them in, then select the Quantity. One bond equals $1,000 face value. Once you click Preview Order, you can review what you’re about to buy. Then click confirm if everything looks right.
Step 5: Once you’ve purchased your U.S. Treasury bonds, you’ll see a confirmation notice that looks like this. Since you’re buying on the secondary market, you’ll see a Third Party Price that earns a slight spread to make a profit. You can then check your position by clicking the Positions link in your account.
The Different Types Of Bonds You Can Buy
U.S. treasury bonds are risk-free investments that offer different yields at various maturities. Given everybody should have a certain percentage of their net worth in cash or cash equivalents, U.S. Treasury bonds are one safe investment option.
Other safe options for investing cash include an online savings account, a Certificate of Deposit (CD), and AAA-rated municipal bonds.
Just know municipalities can sometimes default on their payments if the economy gets bad enough like it did during the 2008 global financial crisis. At least if you buy your state’s municipal bond, you won’t have to pay federal or state income taxes on the coupon payments.
Moving Up The Relative Risk Curve
If you want to take more risk, you can purchase longer-duration CDs, Treasury bonds, or municipal bonds. The risk here lies in liquidity risk and real interest rate risk, not principal risk if you hold to maturity.
For example, if you purchase a 20-year municipal bond but need the money before 20 years, you will likely have to sell at a discount. If you lock in a 10-year treasury bond at 3.92% but inflation continues to increase, then you’ve locked in a suboptimal yield. You could have purchased a 10-year treasury bond with a higher yield.
Alternatively, there are short-term CDs that are currently paying well. At the time of writing, CIT Bank has 18-month CDs earning 4.6% APY. They also have high-yield Savings Connect accounts earning 4.05% APY. These rates are also changing regularly as interest rates change.
As an online-only bank, CIT is able to offer higher interest than most other banks. Its rates are always changing so check often.
Finally, if you want to take even more risk, you can purchase corporate bonds all the way down to Baa/BBB ratings. Corporate bonds are higher risk because corporates have higher default and bankruptcy rates than municipalities and the federal government.
Why Buy U.S. Treasury Bonds?
Here are the main reasons why you might want to buy U.S. Treasury bonds.
1) You want a risk-free investment with a higher yield.
You may want to buy U.S. Treasury bonds because they offer an attractive risk-free yield. You find comfort in knowing you will get 100% of your principal back if you hold to maturity plus coupon payments.
If U.S. treasury bond yields are higher than yields for savings accounts and CDs, then buying a Treasury bond with the same duration makes sense. U.S. treasury bond income is not taxed at the state level. Therefore, if you live in a high income tax state such as California, New Jersey, Connecticut, and Hawaii, U.S. Treasury bonds offer relatively higher returns.
As an investor, you want to invest according to your true risk tolerance. Hence, if you find yourself feeling uneasy during a bear market, you may have too much of your portfolio or net worth in risk assets. Buying Treasuries will help you achieve a more risk-appropriate asset allocation.
2) The risk-free yield is attractive relative to your inflation forecast.
You may also want to buy Treasury bonds because yields are attractive and you believe inflation has peaked. If you believe inflation has peaked, you also believe bond yields have peaked.
For example, you could buy a 5-year Treasury bond yielding 4.38%. If you believe inflation will decline to 2% in one year, you will earn a 2.38% real yield for four more years if you hold to maturity.
In addition, you could sell the 5-year Treasury bond for a profit since it will increase in value. How much the principal value of the treasury bond increases will depend on inflation expectations.
However, the treasury bond could also increase in value to the point where the yield is at parity to the 2% inflation rate at the time. Personally, I don’t think we’ll regret buying Treasury bonds yielding over 5%. A guaranteed return of 5% in an uncertain environment is great.
3) You have a low mortgage rate and like the idea of living for free.
Who doesn’t love getting something for free? Even ultra-rich people have a difficult time passing on a free lunch!
The majority of mortgage holders have a mortgage rate below the yield of a one-year Treasury bond or longer duration (5%+). Therefore, mortgage holders can simply buy U.S. Treasury bonds to live for free for the next 30 years!
For example, you could buy a 30-year Treasury bond with a ~4 percent yield today. For the past two years, most mortgage borrowers were able to refinance to a 30-year fixed-rate of three percent or less. Therefore, not only could you live for free for the next 30 years, but you could also live for free and earn risk-free income.
The only catch is that to truly live for free, you need to buy an equal amount of treasury bonds to your mortgage amount. But even if you can’t, every dollar you do spend buying higher-yielding Treasury bonds is an arbitrage that lowers your true living costs.
Given the rise in U.S. Treasury bond yields, it is currently a suboptimal financial move to pay down mortgage principal. Instead, it’s optimal to buy treasury bonds with much higher yields.
4) You want to generate more passive income.
One of the silver linings during a bear market is higher interest rates. Higher interest rates enable investors to earn greater passive investment income from dividends, rents, and coupons. The reason why is because all risk assets are priced off the risk-free rate of return, Treasury bond yields.
As Treasury bond yields rise, companies are forced to pay higher dividends, coupons, and rents to attract capital and stay competitive. As a result, ironically, it’s easier to generate more passive income in a bear market.
Buying Treasuries can now generate a ~5% risk-free annual rate of return. In the past, your money would have just sat in cash earning nothing. Or it may have been invested in lower-yielding bonds or stocks or growth stocks that pay no dividends.
Thanks to higher Treasury bond yields, I purchased $250,000 worth of Treasury bonds that will generate over $11,000 a year in passive income. Retirees care most about passive investment income, not so much net worth. Here are the best passive income investments ranked.
Treasury Bond Buying Strategies
Before you buy a Treasury bond, you should have a buying strategy based on your liquidity needs, financial goals, existing net worth asset allocation, and your inflation forecasts.
The easiest Treasury bond buying strategy is to buy the shortest duration Treasury bond available. This way, you have minimal liquidity risk and can always buy more short-term Treasury bills at their latest rates. You don’t have to think too much about anything else. The downside is lower yields.
In other words, you can buy 3-month Treasury bills yielding 4% at regular intervals. Let’s say you buy 3-month Treasury bills every month. After three months, you’ll always get principal back every month. You can then use your returned principal to buy another 3-month treasury bill and so forth.
In a rising interest rate environment, buying shorter-duration Treasury bills is the optimal strategy. In a declining interest rate environment, buying longer-duration Treasury bonds is the optimal strategy.
When interest rates are declining or potentially going to decline, you want to lock in a higher yield as inflation and yields fall. If you do, the value of your treasury bonds will increase in value.
The trick is properly forecasting when inflation will roll over, how quickly, and for how long. Further, you need to pay attention to your liquidity needs. If you plan to buy a house in three years, locking up your downpayment in a 10-year Treasury bond may not the best move.
If inflation stays elevated or increases for three years, you will receive a deeper discount to par value if you were to sell your 10-year Treasury bond. Only if inflation collapses when you want to sell would you receive a premium to par value.
Buy Various Duration Treasury Bonds
If you are unsure about the future macroeconomic environment, as many of us are, you can hedge by buying a variety of Treasury bond durations.
Let’s say you have $250,000 in cash with enough cash flow to cover your monthly living expenses by three times. With a 70% conviction level, you believe inflation has peaked. In one year’s time, you believe headline inflation will drop from 8% today to 3.5%. You also want to upgrade your home in three years.
In a normal sloping yield curve, you buy:
- $100,000 worth of 3-year Treasury bonds yielding 4.4%. Because you have strong monthly cash flow, you don’t need the $250,000. You match 40% of your cash hoard with your liquidity needs to get the highest yield possible at the time.
- $50,000 worth of 2-year Treasury bonds yielding 4.2%. The 0.2% yield difference between a 3-year and 2-year bond is insignificant. Just in case you want to upgrade to a nicer home sooner, you want some more liquidity after two years.
- $50,000 worth of 9-month Treasury bills yielding 4%. Psychologically, you like the idea of still getting a 4%+ yield while locking up your money for only nine months. Given there’s still a chance inflation could stay elevated for longer, you want your money back sooner. This way, you can reinvest in a potentially higher-yielding Treasury bill or bond in nine months.
- $50,000 worth of 3-month treasury bills yielding 3.5%. Although you’re not getting a more attractive 4%+ yield, you get peace of mind knowing you get your money back after only three months. Just in case rates continue to rise, you can reinvest at a higher rate. Anything can happen during this most uncertain time.
Buying Individual Bonds Or Bond ETFs / Funds
So far, I’ve discussed strategies for buying individual treasury bonds and holding them to maturity. This way, you are guaranteed to get all your principal back and earn coupon payments in the meantime.
However, you can also buy bond ETFs for more liquidity and investing flexibility. You can sell a bond fund and receive settled cash within three days. If you are a trader, you can invest in bond funds to potentially profit from a potential move down in yields and vice versa.
Just know that if you buy bond funds or ETFs, you face principal risk. Below is an example of IEF, the iShares 7 – 10 Year Treasury Bond ETF, currently at a 12-year low. If you’re OK with holding IEF forever and earning income, that’s fine too.
A Terrible Year For U.S. Bonds Makes Bonds Attractive
2022 will go down as one of the worst years ever for the bond market. As a result, buying Treasury bonds now looks more enticing. In fact, I just mobilized about 60% of my $250,000 cash and bought various Treasury bonds. Once the 10-year Treasury bond yield hit 4%, I just had to lock in some 4%+ risk-free returns with my cash.
When you could only get a 0.65% yield on a 10-year Treasury bond in 2020, why bother? Most didn’t. However, some people did bother because they feared the world was coming to an end. Of course, we know now the world did not end with COVID and the S&P 500 and real estate zoomed higher.
Today, buying a Treasury bond up to a 3-year duration looks attractive. Chances are high inflation will come down within two years. If it does, earning a 4%+ yield will look incrementally more attractive over time. It’s easier to generate more passive income during bear markets caused by rising rats. Take advantage.
Buying a 5-year Treasury bond with a lower 4.38% yield (vs. 4.5% for a 3-year) is a little more difficult. It’s hard to forecast three years into the future, let alone five years. At the same time, locking in a 4%+ rate for longer is also enticing since 2007 was the last time the 10-year bond yield was above 4%.
There’s a chance in five years will look back on today and can’t believe we could’ve locked in 4.38% risk-free money for 20 years. Given the uncertainty of where interest rates and inflation will go, staggering your Treasury bond purchases among different durations is an optimal move.
Lower Expected Returns Make Treasury Bonds More Attractive
Finally, if you believe in lower returns over the next 10 years as Vanguard and many other investment firms do, then aggressively investing the majority of your money in 10-year treasury bonds yielding almost 4% makes sense.
After all, Vanguard’s model believes U.S. stocks will only return 4.02% and U.S bonds will only earn 1.31%. Why bother investing in more volatile stocks when you can get the same return from treasury bonds with no risk? This dilemma is one of reasons why U.S. stocks may have a difficult time rebounding until treasury yields go down.
The thing is, nobody knows the future. But what I do know is that getting a 4%+ risk-free return without having to pay state taxes is attractive. I love the concept of living for free. If the Fed insists on destroying the economy, I might as well take advantage and earn a higher return on my cash.
Reader Questions And Action Items
Readers, are you buying U.S. Treasury bonds today? Why or why not? Where do you expected U.S. treasury bond yields to be in 12, 24, and 36 months?
In addition to buying bonds, I’m a strong believer in investing in private real estate in the Sunbelt region through Fundrise. Over the long term, the Sunbelt region should continue to be a beneficiary of positive demographic shifts toward lower-cost areas of the country. Real estate is cheaper and yields are higher in the Sunbelt.
Since the regional bank runs, mortgage rates have declined dramatically. With real estate prices and mortgage rates down, real estate is looking much more attractive now.
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Chuck Hodge says
What effect do you believe the Federal debt limit,if not raised by Congress, will have on Treasury interest/prin ipal payments on Treasuries?
Financial Samurai says
What are your thoughts on TIPS? Are they a good investment right now. I’d love to see an article comparing them to Treasury Bonds.
SHi Singh says
Would a ladder CD instrument be a good example to invest in during this time? Please confirm.
If purchases are limited to $10k per individual, how are you buying more than $10k?
Financial Samurai says
I bonds and Treasury bonds (unlimited) have different purchase limits.
Thanks for the tip on how to buy Tbonds on Fidelity. For those of us looking to buy smaller amounts at Fidelity, see the blue icon on the right called depth of book. On the right is the buy side, and you can buy in small increments of 1K, at slightly lower yields. Much better than the low yields in some Fidelity sweep acounts for cash.
Fidelity is currently paying 4.2% on cash holdings (and rising every week)… that’s incredible!
The bogey in my mind is 5% on a 20-year treasury bond. If having to hold full term, so be it, but there’s much higher probability that would be a temporary position until the economy breaks, and the Fed lowers rates back to zero. That position would likely result in a 30-50% gain, so sell the bonds and buy stocks at firesale prices, making a killing during the crash as well as on the way back up.
We were close in October, but didn’t quite pull the trigger.
Come on 5% long-dated bonds!! ;)
You can get 5% in 6mo-1yr Treasury so why not lock it in and roll upon maturity. Unlikely, with Fed terminal rate going up, IMO suboptimal to lock in higher duration for lower yields. On platforms like Fidelity one can buy Treasuries at auction easily.
I’ve always felt like I must be missing something with bonds.
Why would you invest in a 1 year t bill instead when you can get a 1 year cd (brokered cd). The rates seem virtually identical although I swear I’ve seen the CD rates higher than the bond rates. If you’re investing in 1 year or less, you’d probably be holding them to maturity. I’ve never heard anyone say anything about brokered CDs – CDs you buy through your brokerage (they are slightly different than a bank CD). Actually, it looks like you can get regular CDs at about the same rate. I guess I could see the advantage if you’re buy more the 250k – but then again, just use different banks.
If you were investing in them with the idea that you’ll sell them if rates go down, it seems like the upside is limited. Also, if you compare bonds to a year ago, yup, there a better deal – I saw no upside to a bond that was paying 0% (wouldn’t invest in a CD at 0% either).
Also, bonds have an interest rate of about 4.75%, inflation 6+% – you’re investing in something that is paying less than inflation, you’re basically losing money – nope, not as volatile as stocks but at least stocks give you a chance of beating inflation (okay, maybe inflation goes back to 2% or less the month after I buy a bond so I might beat it for a couple of years – until the bond matures).
Or buy I bonds with .4% yield after inflation – after I pay taxes on the inflation component and the yield component, I’m not convinced I’d come out ahead (I believe that bonds are taxed as regular income – not even long term cap gain rates). Personally, I’d rather invest in stocks with a tilt toward value and dividend paying stocks – at least I might have a chance against inflation – especially when stocks aren’t trading at all time highs…
I guess I must be missing something with bonds (even at today’s rates and especially when rates were lower).
Financial Samurai says
Sure! Other assets could go down. Better to make 4.77% nominal than lose 20% nominal like the sP 500 did in 2022.
Treasury bonds don’t have state taxes. Cheers.
Ms. Conviviality says
Thanks for informing me about I-9 bonds back in 2022. I got some and also shared the tip with a few family and friends that are much smarter than me and now it makes me look smart too. :)
I’m a long time follower/reader of your newsletters, Sam, and I thank you for your financial coaching. I have noticed that the largest financial market makers (JPM, Goldman, Morgan Stanely, BofA, etc) offer a much higher yield to maturity (YTM) on their debt as we head into uncertain times and I am considering buying some 2-5 year bonds or retail notes. Looking back at the great recession, did any individual/consumer bond holders lose money on their debt holdings IF they held the bonds to maturity? There was so much restructuring and buyouts to save the financial industry that I can’t seem to find a straight answer when I google this topic. If I invest in uber large bank bonds now, I need some warm and fuzzies that if 2008/2009 happens again (for any reason), there was a historical precedent in place that protected the little guy.
Great info, Sam, thank you! What are your thoughts on ‘retail notes’? I see that Goldman Sachs is offering a five year at 6.75% coupon and JPM is 5.75% for 4 years. I know that the ‘retail notes’ are not ‘senior debt’ but they trade like bonds. Given the stormy headwinds in the next 12-36 months, would it be prudent to consider JPM and GS uber safe for retail notes?
Sam K says
Great primer. Thank you! I’ll soon be in decumulation mode. Any thoughts or info sources on what to consider in deciding between TIPS vs a non-TIPS Treasury ladder in today’s rate environment?
Given that the interest from bonds is regarded as income and in my tax bracket (37%) still makes sense to pay off the 2.875% mortgage than buying 4.3 % bonds (post tax : 4.3% X 0.63 = 2.7%), am I missing someting?
Financial Samurai says
Seems like you can’t lose. I never regret paying down debt. But I do lose motivation to hustle if I have no mortgage.
everyone here is discussing investments in government bonds but no one mentions hybrids (banks), opportunities in bank hybrids and their low correlation with equities. Any thoughts?
Peter Moore says
A number of the Dividend Aristocrat stock prices have dropped to the point that they are paying between 5% and 6%. These are companies like IBM (5.43%) and Walgreens (5.92%). The risk of dividend reductions from most of these companies is low, given that they all have a history of never reducing dividends. Does it make sense to look at strong companies for income purposes instead of treasuries given the tax treatment of coupons vs. dividends? We have some money in a money market that we don’t need for liquidity purposes and want to get more passive income.
Financial Samurai says
It definitely is worth looking at strong balance sheet and cash flow companies that pay higher dividend than treasuries right now. The risk is these companies may cut their dividend payout in a downmarket.
But long term, buying some dividend aristocrats now looks attractive. Legging in!
So long as the dividend payers aren’t value “traps”! Hard to sometimes make that determination. Many high dividend paying stocks like INTC or IBM are slow growers that are facing competitive obsolescence so I’d be wary of not comparing them to the safe yields of a Treasury with no risk of principal loss. Am I missing something?
whipple Newell says
Not sure if this is how to leave a review for your podcasts/ website? I wanted to let you know that I recently stumbled onto your website and podcast and love it!!! You really dumb it down for normal people. Please keep up your great work and info, can’t wait for more !!!
Mark Dias says
As a retiree, every year I take out my annual withdrawal from my portfolio at Schwab that I will need for the year and put it in my bank, but I have an account with Treasury Direct so I put the money in different maturities with them so every quarter it deposits in my bank what I need for my expenses . In addition, with Schwab I have been purchasing two year and three year treasuries and 5 and 10 year TIPs.(30 year too long).
I also Max out my I-bonds. I do the maximum 35k worth. 10k for me 10k for my wife 10k for my trust and 5k for my tax refund (always overpay my taxes by 5k)
Financial Samurai says
Smart on all the I Bond purchases.
Interesting idea – intentionally overpaying on your taxes so you can get the refund and divert it into iBonds. Sort a back-door T-Bond move!
So here’s a scenario – would it actually work? Would the IRS permit it?
You end up managing your taxable income pretty well and end up with $0 income tax due, which you calculated carefully in mid-December of the current year. You decide to set up a back-door T-bond buy by sending an estimated tax payment of $5000 to the IRS on December 20 of the current year, in anticipation of ending up with a $5k tax refund due when you file your taxes the following year.
Would that work?
ed cross says
GR8 article Thank you
Sir, such a timely post.
I’m holding TLT and EDV in brokerage accounts, for the convenience and liquidity. TreasuryDirect is too much work.
I expect the 10-Year UST yield to be below 1% in 12 months. Of course, no one can predict the future. Not even you, Sam. Haha!
Thank you so much for writing this. I’ve been trying to figure out the diff between the coupon payment, effective yield, and why bonds trade under par. It is all here! Please keep it up.
Financial Samurai says
You’re welcome! My wife asked me about the coupon payment differentials of various bonds with similar maturity dates when she wanted to buy. And it was fun to figure it out.
I’m sure many many investors are wondering the same thing as well.
Manuel Campbell says
I have purchased some treasuries. But it’s not for investment. It’s more like a temporary cash balance (buffer). I’ve done it through my investment broker.
If you have a chance, I would be interested in knowing what you think, as a former financial professional, about the concept of a ‘crack-up boom’. If you go on investopedia, the definition states that it’s essentially a crash of the monetary system in which there is a continuous credit expansion generating always more acceleration in price increases. Which looks pretty much like what we have right now. Does this theory make sense to you, or do you see strong arguments against this possibility ?
If we are in this situation, the last thing you would like to own is a long term bond, and the second worse asset for investment would be cash or treasuries.
As for myself, I’m still 100% equity (except for that cash buffer) and I would have difficulty considering investing in bonds unless I can get a really good return, like maybe a 6% or 8%. And inflation would have to prove it can go back and stay below 2% …
Financial Samurai says
Never heard of a “ crack-up boom.” What type of price increases is it and are you referring to?
So long as you are investing according to your risk tolerance and objectives, all is good. Where are you now in your financial journey?
Ever since I left work in 2012, I’ve been more conservative because I feared having to go back to work. The time for 100% equities for me ended in my 20s.
Manuel Campbell says
A “crack-up boom” occurs when inflation is high (for example 10%-15%), but a government keep interest rates on their debt below that level (for example, fed funds rate below 5% permanently).
This situation has to be maintained over an extended period of time, in term of years for example, although there is no definite period of time, because it is dependant on the confidence of the population in the currency of the country, mainly defined as the “expectations of future inflation”. In other words, when a majority of the population believes the situation described above will happen, then there is ultimately a crash in the currency at one point or the other.
If we think about a crash in the stock market, we would normally think about a minimum 20% drop in a matter of weeks or months. That was the case for the 1987 crash. The financial crisis led to a 50% drop, while the 1929 crash led to a 90% drop.
If we use the same measurements in term of a currency crash, we could have a similar drop in term of percentage. The difference would be that the “crash” would be in the opposite direction, meaning that the price of everything would go “up” in a matter of weeks or months (stocks, real estate, goods and services), while the currency drop in value.
In term of percentage, the crash could be small one-time event. We would then experience a 25% sudden increase in prices of everything (mathematical inverse of -20%). If we have a more severe crash, this could represent a 100% price increase (mathematical inverse of -50%). In the worst case scenario, we would have a +1000% price increase or a ten-fold increase in prices (mathematical inverse of -90%). In this situation, a BigMac would cost something like 100$ and the market cap of McDonald’s would surpass US$1 trillion, as an example.
It is not my theory. This is a theory developed by the economist Ludwig von Mises in his book “The Theory of Money and Credit” written in 1912. You can refer to his book if you want a more detailed explanation. I did my best to summarize, but he probably explains better than me …
In his book, he says that when expectations of inflation become higher that the interest rates paid to lenders, a currency crash is inevitable.
So, I was wondering what you think about the actual situation and do you see a possibility that we experience something like a “crack-up boom” in the future.
Thank you !
Financial Samurai says
Sounds good. Thanks for the explanation. Owning stocks and real estate as a hedge and beneficiary of long-term inflation is something I believe in.
But I don’t believe in a “crack-up boom.” The cure for higher prices is higher prices.
Remind me again where are you on your financial journey to feel comfortable having 100% in equities? What are some of your short-term and long-term objectives? Thanks
Manuel Campbell says
Thanks for your answer !
The “cure for higher prices is higher prices” is a fundamental law in economy. But according to von Mises, it would break when there is a continuous credit expansion, for example, when governments send checks to the population to pay for higher gas prices by borrowing, directly or indirectly, at the central bank at a rate lower than inflation.
In this situation, the higher prices (nominal economy) can’t stop higher consumption (real economy) so prices go ever higher, as long as governments continue to fund this higher price loop.
Anyway, that’s what I thought might happen …
I am “retired early”, if we can call that this way. Or maybe it would be more appropriate to just call myself a “full-time investor”.
I don’t have any real short-term or long-term objectives other than to have to highest level of capital, try to avoid permanent capital losses, after considering inflation, and enjoy life as much as possible.
Actually, the dividends I receive are enough to cover my expenses. If I can get even more dividends in the future, I will spend on more discretionary expenses and help others.
This year has been a particularly tough one for equities. But on the flip side, I see a lot more opportunities arising from the large decline in stocks. I’m looking for more stability in the markets (eg. VIX under 15) before I make more major changes to my portfolio.
I am currently down -8.65% YTD. My portfolio yield is now 2.8%. And the “P/E ratio” of my portfolio is now 12.3, or a “earning power” of 8.1%. If I make changes, maybe I could get that yield above the 4% mark. That would be great ! Otherwise, I will have to sell some investments and buy more treasuries …
Anyway, in the end, I try to make the best investments possible. Not just look for the best yield or rates. But that’s not always easy. Market have been pretty “shaky” in the last few years.
Paper Tiger says
If you are ~100% equities and only down 8.65% YTD then you must be invested in some individual stocks that have done really well to offset all of the indexes that are down 20%+.
Manuel Campbell says
This sounds like what Ray Dalio talked about in the beginning of his book Principals for Dealing with the Changing World Order, but didn’t use that term
Super helpful and timely article! I’ve been legging into treasuries this week. I wish I could buy more series I bonds, but I already hit the limit for this year. And yes – I can vouch for the insanely long wait to get an account unlocked. I stupidly had that problem. I tried in the spring sometimes and gave up because they weren’t even putting people on hold because the call volume was so insane. So I was grateful I was able to be put on hold when I called in earlier this month even though it took a long time.
Internet Anon says
Are these strategies feasible in an IRA account?
Diana Kuai says
Yes, it works for IRA accounts if you go with the brokerage platform as Sam described and buy in the secondary market.
Hi Sam, thank you for this write up. I acquired the Series I Bond in 2021. Now I want to understand what else I can purchase with $20k. Should I purchase a few 3-mth notes? I’m a newbie but want to try. I truly enjoy your messages. Thank you and enjoy your family time. Sincerely, Jackie of MD
Why not do the same ladder strategy with CD’s? For example 1-3 month CDs are offering 3.35%, 4-6 month is 3.8%, 7-9 months is 3.95%?
Financial Samurai says
Can definitely do the same. You just have to compare the rate for similar terms and the AFTER-TAX net yield since you will have to pay state income taxes on CD income.
Bob Herczeg says
Great article! Your detail and how-to was very helpful, along with the rationale for doing so. I’ll be doing exactly what you outlined!
Super interesting, thank you Sam.
From a tax perspective, is there a difference in buying a bond at $100 (face value) with a ~4% yield, versus buying an older bond at say, $95, that has a lower yield, but still has the same 4% effective yield because you’ll get redeemed at $100 when the bond matures?
Like, is one capital gains vs income, and with the right approach can you get LTCG (better taxation) versus ordinary dividend income (worst taxation?).
I had this same question.
Financial Samurai says
I think the tax treatment is the same. Worth double checking with the online brokerage.
FYI double checked with Fidelity
-The coupon payments are taxable as income (though apparently no state tax)
-The “appreciation” is capital gains.
-If you hold for >1y, that appreciation becomes long-term capital gains.
So, seems the optimal move for a taxable account is to buy a zero coupon bond that’s 1y+ to maturity.
Financial Samurai says
Good you checked. Thanks.
If you buy zero coupon, you pay take on the difference between par value and discount purchase price. So one has to make an estimate on their annual income to calculate their marginal tax rates.
Whit Whitacre says
What a timely article Sam. I started laddering into 1 year T-Bills in August. 3% then, 4% today and I think we will see 4.5% soon. As interest rates peak, some think that will be in the first quarter of 2023, I plan on locking in longer term bonds. Also it is good to know these returns are not taxed at State level.
Glad you mentioned that TreasuryDirect.gov is cumbersome and has no customer service. I bought I Bonds last year but was unable to log into my account after. Calling the customer service line 4 different times put me on hold waiting to speak to someone for over an hour. Never got through. Very frustrating. By all means use your brokerage account to buy bills or bonds. I use Interactive Brokers.
Keep the good advise coming!
Financial Samurai says
You’re welcome! Yes, don’t lose your password for treasury direct folks. You and the boys taking over an hour of your life try to get through.
It makes sense three month treasury bills would be closer to 4.5% if the Fed really does hike to 4.5%+. But I hope the Fed doesn’t go that far because the economy is unraveling right now. A lot of middle class people who depend on jobs and retirees who depend on their investments will suffer greatly.
Bradley P says
How much cash do you keep on hand to make these investments (into Treasury Bonds)? I might have read somewhere that you recommend 6 months of living expenses… is this investment coming for you out of those cash living expenses (assuming not, since you need it to be liquid) or some other investment-worthy cash source you keep beyond that?
Financial Samurai says
Six months of living expenses or more is recommended. However, if you’re buying 3-month treasury bills, after 3-months, you’re always getting your principal back. So you could conceivable just have just two month of living expenses if you’re just investing in 3-month t-bills.
What about an ETF like STIP?
Man, is that really yielding 6%?