Dear Dr. Don,
I want to know if U.S. Treasury notes are a safe investment.
-- Nervous Investor
There's always a bit of a scare when Congress debates whether to raise the debt ceiling. In addition, bond rating agencies have been making some noise about downgrading the debt rating of the U.S. government's debt.
Still, U.S. Treasury securities are backed by the full faith and taxing power of the U.S. government, which is considerable.
The increase to the debt ceiling was signed into law by President Barack Obama on Dec. 28, 2009. It increases the ceiling by $290 billion to a total legal limit of $12.394 trillion. Those of you playing along at home can track the total public debt outstanding using the "Debt to the Penny" feature on the TreasuryDirect Web site. I did as I wrote this reply and the total public debt outstanding was $12,101,272,618,959.09.
There are two ways to lose money on an investment in Treasury securities (aside from the security fluctuating in value with market interest rates). First, there's risk to principal -- but the fact that the government backs these securities protects you against that risk.
Second, there's the risk to purchasing power, which could occur if the investment fails to earn a yield greater than inflation.
If your investment yield doesn't outpace inflation, the purchasing power of that investment declines. An investment in Treasury Inflation-Protected Securities, or TIPS, can hedge against both purchasing power risk and risk to principal.
While we're on the topic, let's distinguish between Treasury bills, notes and bonds. A Treasury bill has a final maturity of a year or less when issued. A Treasury note matures one to 10 years after issuance. Treasury bonds have maturities of more than 10 but not more than 30 years. Savings bonds are nonmarketable U.S. government securities that also are backed by the full faith and credit of the U.S. government.
U.S. Treasury securities are considered one of the safest investments in the world, at least as it relates to risk to principal. That's why money flocks to these securities when there's a crisis of confidence in the world capital markets. This is known as a "flight to quality," and it's the world voting with its pocketbook in uncertain economic times to invest in something with certain value.
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