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In the past, it was not only patriotic, but also a safe investment to lend money to the government in the form of US treasury securities.
The government is almost always in need of funds and by investing in treasury securities, you are essentially lending money to the government for an agreed amount of time. In exchange for borrowing your money, the U.S government pays interest on your funds.
There are three categories of treasury securities;
- T-Bills: These have the shortest maturity or lending term of all of the government securities, with five terms, four, eight, 13, 26 and 52 weeks. These are issued at a discount to reach the par value at maturity. The difference between these prices constitutes the interest you’ll be paid on the bill.
- T-Notes: These are the mid range maturity treasury security. There are maturity terms of two, three, five, seven years, which are auctioned off every month, but there are also 10 year notes issued several times a year. Treasury notes have a $100 par value and they mature at the same price, but they do pay interest semiannually.
- T-Bonds: These are the long investment options in the treasury securities family. Essentially, they are essential to T-Notes, but they mature in 30 years. These bonds are available monthly and most pay interest semi annually.
Who Buys US Treasury Securities?
Treasury securities appeal to virtually all types of investors, from individuals and institutions to estates, countries, corporations and trusts. The reason for this is that treasuries are considered to be safe and can help to meet certain objectives including receiving interest according to a specified schedule.
The treasury security rates tend to be quite stable, but there are some fluctuations. While this may not offer the returns of investing in stocks or commodities, treasury securities provide some security for investors. They are considered safe as you are not likely to lose your initial capital and you can expect to receive returns as agreed at the start of the investment.
So, if you’re planning on investing in the short to long term and want a guaranteed rate, treasury securities are considered a viable investment vehicle.
The Crazy Spike of US National Debt
One of the main reasons that many people are starting to get concerned about treasury securities is the state of the US national debt. Most of us are aware that national debt is a part of government spending policy, but in recent years, the level of national debt seems to have spiked in a crazy and potentially unsustainable pattern.
The government generates revenue from taxes, such as income tax, property tax and commercial taxes. However, the government also has a spending budget, which does not always match up to the amount of revenue generated.
For example, in times of war, the government needs more money for military spending, so the spending may be more than the current revenue, creating a deficit. The first reason for this drastic increase is the ongoing money injection of the FED since 2008. QE1, QE2 and QE3 injected trillions of billions to the system and therefore, the national debt increased.
However, as we can see in the chart above, in recent years, the most significant increase in national debt has occurred following the 2020 Covid Pandemic. This spiked the national debt to over $30 trillion and the figure has continued to grow.
United States Has One Of The Highest Debt to GDP Ratio
The other significance of national debt is when it is compared as a percentage of the GDP. The GDP or Gross Domestic Product represents how much money we are generating as a country. Unfortunately, when we look at the national debt as a percentage of US GDP, the picture is not any prettier.
Before WW2, national debt was never above 50% of the GDP, but over the years, this figure has gotten higher and higher. It spiked after WW2, but by the 1950s, it was back under the 50% mark, dropping as low as 31% in the early 1980s. However, since 2014, the figure has been at 100% or over, with a spike up to 120% or higher over the last three years.
To put this into perspective, imagine if you went into a bank for a loan and you explained that your spending was well over more than your income. Do you think the bank would lend you anything?
Does the Interest the US Government Pays Make Sense?
Another reason why many are shying away from treasury securities is that the interest paid is quite low. When you look at the rates on offer for the various products and then compare them with products available to personal consumers often offering similar rates.
However, it is important to note that with treasury securities, you can lock in your rate for the full term of the product. Most deposit products at banks and financial institutions have variable rates. This means that while inflation is high and interest rates are on the rise, you can benefit from a higher rate of return. But, once the interest rate drops back down, your savings rate will quickly follow.
Fortunately, there are some products that do allow you to lock in a rate for the entire term, such as CDs or certificates of deposit. Currently, there are a number of CDs which offer similar if not higher rates than treasury securities. You’ll also have the reassurance of FDIC insurance, which provides up to $250,000 of coverage in the event that the bank fails.
Financial Institution | Savings APY | CD APY |
|---|---|---|
American Express
| 4.00% | Up to 4.00% |
Marcus
| 4.10% | 3.60% – 4.10% |
Capital One
| 4.00% | 3.50% – 4.00%
|
Discover Bank
| 4.00% | 2.00% – 4.10%
|
Quontic | 4.00% | 3.00% – 4.95% |
UFB Direct
| Up to 4.31% | / |
Ally Bank
| 4.00% | 3.00% – 4.30% |
TIAA Bank
| 5.05% | 3.50% – 4.30% |
Can the US Go Bankrupt?
One of the foundations of why treasury securities are considered safe is that the products are backed by the financial security of the US government. The only scenario where you would stand to lose your investment is if the government goes bankrupt. But, how likely is this?
There have been a number of instances in the past where countries have declared bankruptcy, but the US has some solid factors which indicate that this is not likely to happen.
Firstly, regardless of the current economic situation, the US is considered the top economy in the world. It has the largest economy in terms of nominal GDP, but it also has one of the highest purchasing power parity ratings.
This generates a high degree of market trust, which provides high consumer confidence and this also reduces the likelihood that the US could go bankrupt.
Another important factor is that the dollar is considered a reserve currency around the world. Since the dollar is often used for international trade, it creates strength in the economy that could prevent bankruptcy.
However, if the government could reduce national debt, it would bolster its position and create even greater stability. There are a number of ways that this can be accomplished, such as cutting spending, increasing taxes and other reforms, but this will depend on the policies of the specific administration.
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Does US Credit Risk Make Sense?
Treasury Securities in the US are considered to almost free of any credit risk. Although some agencies have been downgraded their rating, They are often classified between AA+ to AAA rating by credit rating agencies, which is close to the highest possible award from credit rating agencies such as Fitch, Moody's and S&P. This is because the securities are backed by the U.S government and its ability to collect taxes and meet any financial obligations.
However, there is some argument that there is some bias with credit rating agencies, since they operate on the basis that the system cannot fail.
In fact, credit agencies have received criticism numerous times for giving high credit ratings to items that later were revealed to be high risk investments. The credit rating agencies failed to identify the risks that could have warned investors against particular securities.
So, there is some question about whether the ratings issued by credit rating agencies can be fully depended upon.
What Does This Mean For Investors?
While there is little chance of the US government defaulting on repaying treasury securities, it is always a good idea to ensure that you have diversification in your investments. Rather than putting most or all of your money into treasury securities, it is a good idea to consider non-fiat assets. This includes gold, stocks, real estate and crypto.
These types of investment may carry a greater risk, but they will allow you to have a more diverse portfolio, which will reduce the overall investment risk. Obviously, you will need to perform your own due diligence to ensure that the investment choices meet with your risk tolerance.
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