Why You Won't Regret Buying Treasury Bonds Yielding 5%+ (2024)

Recently, I can't help but shovel more money into Treasury bonds. With 3-month-to-1-year Treasury bonds yielding 5%.4+, I feel like the guaranteed return is too high to pass up.

But the more Treasury bonds I buy, the more I wonder whether I will regret the decision a year from now. Perhaps you are starting to wonder the same thing.

Back during the 2008 global financial crisis, I ended up buying some 5-year CDs yielding 4.25%. At the time, I also thought those were fantastic rates, especially as the stock market was falling apart. However, investing in the S&P 500 would have been a much better investment.

My gut instinct tells me I won't regret buying Treasury bonds today. But let's go through the reasons why.

For background, I’ve been investing for over 27 years, worked in finance for 13 years, and retired in 2012. I started Financial Samurai in 2009 and have written over 2,500 articles.

The Risk Of Buying Risk-Free Treasury Bonds Today

Let's first go through the downsides of buying Treasury bonds with a 5%+ guaranteed return. You can buy Treasury bonds from Treasury Direct or through any online brokerage. The interest rates in the chart below are even higher now.

1) Reduced liquidity

In order to get your guaranteed Treasury bond return, you have to hold the bonds until maturity. If you don't, you may have to sell at a discount if rates stay flat or go up. The discount ultimately gets translated into having to pay more for the item you're looking to buy.

Most online brokerage accounts are automatically offering higher cash yields on uninvested cash. For example, Fidelity is offering 4.11%.

2) Missing out on potentially higher returns

The money you used to buy Treasury bonds could have been invested in other higher-performing investments. A 5% guaranteed return sounds good but is ~5% below the .

Besides using the money to invest in stocks, real estate, venture capital, and other private investments, you could also use the money to invest in your own business. Private business returns can often be much greater if things start working.

If you don't already have the appropriate net worth asset allocation in risk assets, then you may regret buying Treasury bonds, even with their current high yields.

3) Have to pay taxes

If you invest in Treasury bonds, you will receive a 1099-INT form from the Department of Treasury. You will have to pay your marginal federal income tax rate on the income. Thankfully, you will not have to pay state or local taxes on the income.

If you buy a Treasury bond at a discounted price and then sell it at a premium price, that profit will be taxable as a capital gain. Therefore, the higher your ordinary income, the higher your Treasury bond tax rate.

Why I Won't Regret Buying Treasury Bonds Yielding 5%+

Now that I've discussed the main downsides of buying Treasury bonds, let me share why I'm happy to accumulate more Treasury bonds. Perhaps some of the reasons will help support your reasons as well.

1) A 5% return is higher than our safe withdrawal rate

Our safe withdrawal rate is currently 0%. It is 0% because we can live 100% off our online income. All investment income gets 100% reinvested. If you are working your safe withdrawal rate is 0% too!

If we had no online income, as retirees, our safe withdrawal rate would be between 2% – 3% to cover all our desired living expenses. Therefore, any return about 3% – 4% after taxes is enough to buy us another year of living expenses.

2) There's no upcoming big ticket item we want to buy

Although I keep on dreaming of buying a nicer house, realistically we aren't going to buy another house after buying our current one in 2020. Moving is too much of a pain.

We also aren't going to buy a new car for at least another three years. When the time comes, maybe we'll lease a new car as a company expense. With 40,500 miles on our current car, it hopefully still has many more years left to go before it becomes a money pit.

Finally, we have superfunded, and then some, both of our children's 529 plans. All other expenses can comfortably be covered through investment income or online income.

3) We're happy with what we have

Another way of saying there's nothing big we want to buy is that we're happy with what we have.

We have no desire for fancy clothes, jewelry, or watches. My watch collecting and dealing days are over.

Taking international luxury vacations is out of the cards for the next five years since our kids are still too young to appreciate or remember their trips.

We also don't have any reckless addictions like gambling, drugs, alcohol, or other vices that could set us back. I've been watching more high-stakes poker online recently and some players lose lots of money quick!

Here's a killer poker hand showing how one man lost $1 million of real money. Although the winner wins the biggest pot in live poker history, he ends up only finishing up ~$150,000 for the day.

4) Treasury bonds provide free living for most mortgage holders

80%+ of existing mortgages have rates under 5%.

A 5.5% return pays for our 2.125% primary mortgage rate and then some. Whenever you can earn a greater risk-free rate of return than your mortgage rate, you should take full advantage.

Psychologically, it feels like we are living for free every time we buy another slug of Treasury bonds. Given we continue to pay our mortgage on a monthly basis, it feels like we are double winning by paying down principal plus living for free.

Eventually, we'll pay off the mortgage. When that time comes, we will hopefully look back and marvel at how cheap homeownership really was. We'll also have a valuable asset that can either be sold or provide us with rent-free living.

5) I'm in decumulation mode

Earning anything above 0% adds to our net worth. However, I decided to enter decumulation mode in 2022 at the age of 45 because I don't want to die with too much. We hit our net worth targets for our age and do not want to pay a death tax rate of 40% on remaining assets.

Hence, I don't feel it's necessary to take excess risks to earn a greater return than the risk-free rate. In fact, despite inflation, I feel blessed to be able to return 5% risk-free on our money after years of earning 1% or less.

Making 1% or less on cash felt terrible. However, making 5%+ on cash feels incredible. We have a difficult time spending all our investment income as it is.

6) We've experienced enough stress and anxiety since 2020

Life wouldn't have been too difficult if we didn't have young kids during the pandemic. But having a pandemic baby and a toddler from 2020-2022 has given us tremendous mental fatigue.

When risk assets were appreciating in value in 2020 and 2021, the pandemic was more tolerable. But then to lose all of 2021's gains in 2022 stunk. Thankfully, life also went back to normal by the second half of 2022.

I'm happy to eliminate some investment stress for the next year as we mentally recuperate. We already have plenty of risk asset exposure with our existing investments. Hence, we don't feel the need to add more exposure.

It feels great knowing that any money we save will be there plus five percent a year from now. It didn't feel good to work for free in 2022 (no net worth growth).

7) 5% Treasury bond yields won't last forever

When the Fed gets done hiking rates by the end of 2023, the clock will start ticking as to when the Fed will start lowering rates again. By end-2024, the Fed will begin to cut again. If they do, Treasury bill rates (one year during or less) will begin to decline.

Hence, my strategy is to buy as many one-year Treasury bonds as I can during the month I think the Fed will start cutting rates. This way, I'll lock in the highest risk-free return for the longest duration of time.

Buying Treasury bonds when yields are at the highest level since 2007 seems like a good bet to me. If and when yields fall, your existing bonds become more valuable.

Then as Treasury bond yields decline, so will mortgage rates. As mortgage rates decline, the demand for real estate will rebound. Hence, the key is to try to invest in real estate right before rates start declining.

With real estate prices already down between 5% – 15%, I continue to dollar-cost average into public REITs and private real estate funds like Fundrise, which outperformed in 2022. As mortgage rates decline, the demand for real estate will increase. Those with a lot of cash are taking advantage of deals right now.

8) Less burden on what to do with excess cash

If you spend less than you make, you will accumulate excess cash. If you accumulate too much excess cash, it will start burning a hole in your pocket. The growing burden can be discomforting.

By parking your excess cash in short-duration Treasury bonds, you not only eliminate the discomfort, but you also earn a nominal return. With one less thing to worry about, you can spend more time doing something else more enjoyable.

Thankfully, money market rates with online brokerages have also risen so any idle cash automatically benefits.

9) A decent chance Treasury bonds will outperform stocks and real estate

The final reason why you will likely not regret buying Treasury bonds is because they could outperform stocks, real estate, and other risk assets over the next 12 months. You never know!

I'd rather benefit from higher rates than only let higher rates punish my investments.

Here's how I'd invest $250,000 now. Higher Treasury bond yields make investing in risk assets less attractive and vice versa.

Owning Treasury Bonds Gives Me Peace Of Mind

Imagine if you had $20 million. At a 5% risk-free return, you would earn $1 million guaranteed. Wouldn't you take that all day long? I would.

I know most of us don't have $20 million to invest. It's just a good thought exercise to consider when deciding on where to invest.

If I felt strongly the S&P 500 or real estate had a 10% or greater upside from here, I'd buy fewer Treasury bonds. However, it's hard to see the S&P 500 break past 4,200 in 2023. Further, real estate is going through a retrenchment period that could easily last for another 6-12 months.

Therefore, I don't mind earning 5% while we get through an earnings slowdown, more Fed rate hikes, and a potential recession. I think there's a 80% chance we enter another medium recession by 2025.

If risk assets do take off, then great! My existing portfolio will benefit and my Treasury bonds will still earn a 5% return. If risk assets sell off again, then at least my Treasury bonds will outperform.

I'll be buying more stocks if the S&P 500 gets below 4,200 again. And whenever I see 10% or greater corrections in public or private real estate deals that fit my portfolio, I'll buy.

In the meantime, most of my cash is going toward Treasury bonds and my capital calls for my various private investments.

Reader Questions And Suggestions

What are some other downsides of buying Treasury bonds yielding 5% that you can think of? Do you think you'll regret buying Treasury bonds in the future? If so, why?

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Treasury Bond Invest Alternative

One of the best times to buy real estate is when mortgage rates are high and demand is low. In this scenario, you can find better deals as a buyer with better terms. When mortgage rates eventually decline, it will unleash a tremendous amount of pent-up real estate demand to boost prices.

Check out Fundrise, my favorite vertically integrated real estate manager. Fundrise offers multiple private funds that predominantly invests in residential and industrial real estate in the Sunbelt region. The Sunbelt region has lower valuations and higher net yields. The investment minimum is only $10.

In addition, one of the most interesting funds I'm allocating new capital toward is theInnovation Fund. The Innovation fund invests in:

• Artificial Intelligence & MachineLearning
• Modern DataInfrastructure
• Development Operations(DevOps)
• Financial Technology(FinTech)
• Real Estate & Property Technology(PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. The investment minimum is also only $10, as Fundrise has democratized access to venture capital as well. Most venture capital funds have a $200,000+ minimum.

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