Saving in a low-yield world
savings
Safe havens: U.S. Treasury securities

Safety is the name of the game when it comes to your savings. The last thing you want when trying to build a savings cushion is to lose it all and return to square one.

Fortunately, you can stash savings in a number of safe financial instruments that also reward your efforts with a little free money in the form of interest.

While they aren't going to set the world on fire with sky-high returns, the following investments each provide a safe place to park your savings:

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Places to park your cash

U.S. Treasury securities

  • What they are: U.S. Treasury securities include bills, notes, bonds, U.S. savings bonds and Treasury inflation-protected securities.

    Treasury bills, or T-bills, are short-term debt instruments the U.S. government issues to raise money to pay for projects and pay its debts. Maturities of T-bills range from a few days to 52 weeks. Technically, T-bills are not interest-bearing. Instead, they are sold at a discount from their face value, and the government pays you full face value when the bills mature. For example, if you buy a $1,000 T-bill for $980, you would earn $20 on your investment.

    Treasury notes, or T-notes, are issued in terms of two, three, five, seven and 10 years and pay interest every six months until they mature. The price of a note may be greater than, less than or equal to the face value of the note, depending on demand. If demand by investors is high, the notes will trade at a premium, which effectively reduces investor return. Upon maturity, investors are paid face value.

    Treasury bonds are issued with 30-year maturities and pay interest every six months. They are sold at auction four times a year: in February, May, August and November. The price and yield are determined at auction. Upon maturity, you are paid face value plus interest.

    U.S. savings bonds come in two different varieties: Series EE savings bonds and Series I savings bonds. Both can be redeemed after a minimum of one year, but redeeming them after less than five years results in forfeiting three months' worth of interest. The primary difference between the two types is that Series EE savings bonds have a rate that's completely fixed, while Series I bonds have a variable-rate component indexed to inflation. Savings bonds are accrual-type securities, meaning the interest is added to the bond monthly and is paid when the bond is cashed.

    Treasury inflation-protected securities -- more commonly known as TIPS -- have a principal component that is guaranteed to increase with inflation and decrease with deflation as measured by the Consumer Price Index. TIPS also pay interest twice yearly at a fixed rate. This amount is applied to the adjusted principal and also rises and falls with the inflation rate. When a TIPS reaches maturity, the investor receives either the original principal or the adjusted principal, whichever is greater.

    Bills, notes, bonds and TIPS are offered in increments of $100. U.S. savings bonds can be purchased for as little as $25 electronically or $50 if purchased in person at a bank or other financial institution.
  • Risk: Treasury securities are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government. You can count on getting interest and principal back at maturity.
  • Liquidity: All Treasury securities are liquid, but if you sell prior to maturity you may experience gains or losses depending on the interest rate environment (see risks, above).
  • Pros and cons: Treasury securities are considered an affordable, safe investment for the average investor. The value of securities fluctuates depending on whether interest rates are up or down. In a rising rate environment, existing bonds lose their allure because investors can get a higher return from newly issued bonds. Therefore, if you try to sell your bond before maturity, you may experience a capital loss.

    Low return on your investment -- in exchange for lower risk -- is the main downside to Treasuries. Many Treasuries also are subject to inflation pressures. If the interest rate of the security is not as high as inflation, investors lose purchasing power. Because they mature quickly, the risk of holding T-bills is not as great as with the longer-term T-notes or T-bonds.

    Some Treasuries offer measures of protection against inflation. Series EE bonds are guaranteed to double in value after 20 years, regardless of the interest rate you initially buy them at. Series I bonds are partially indexed to inflation. Treasury inflation-protected securities are guaranteed to keep pace with inflation; however, they also may decline in value in periods of deflation.

    Interest income from all five types of Treasuries is subject to federal income tax but exempt from local and state income taxes.
  • Where to find them: Treasury securities can be bought and sold via the TreasuryDirect program or through a broker or financial institution.

 

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