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Treasury investments

·2 mins
  • Doesn’t make a lot of sense to buy “total bond index” funds because they contain:
    • Corporate bonds: these are strongly correlated to corporate stocks. Apparently, they behave as bonds during good times but as stocks otherwise.
    • Low credit rating stuff: no point in taking risk on this front.
    • US treasury is probably the best bond investment in US (and possibly the world). If there are issues in treasuries, those will anyway spill over in other parts of US and world markets.
      • Only need to think of optimal bond duration.
  • Long-term treasury:
    • Solid diversification to equities but can be volatile.
    • Carry interest/inflation rate risk: low interest rates => high returns, high interest rates => poor performance. (Higher inflation => lower purchasing power of your existing bonds.)
  • Short-term treasury:
    • Less volatile and risky, so less reward.
  • Intermediate-term treasury:
    • Sit between long and short term treasuries, i.e. less diversification to stocks and safer & less volatile than long-term treasuries.

Here’s how I am thinking about my investment strategy:

  • As I start investing in bonds, first 20% will go into long-term treasurys.
  • If/when I want to go more than 20% of the portfolio in bonds, the next 20% (of the overall portfolio) in a intermediate treasury fund.
  • As I move closer to retirement, I can switch to intermediate TIPS (i.e. inflation-protected treasuries) to decrease the risk from unexpected inflation.