U.S. government-issued bonds, also known as Treasury bonds, have been put through the wringer in recent years after historically high losses in 2022 due to multiple interest rate hikes.
Still, despite the recent turmoil, it’s worth remembering that historically, Treasury bonds have provided investors with tangible diversification, safety and income benefits over many market cycles.
Unlike corporate bonds, Treasurys are guaranteed by the U.S. government and thus possess a much higher credit rating and lower risk of default. As such, Treasury bond investors have much greater assurance that their interest payments will be received on time and their principal investment will be returned upon maturity.
“The biggest reason to consider Treasurys today is if there is a further flight out of risk due to an economic recession or further bank failures,” says Sam G. Huszczo, founder and chief investment officer of SGH Wealth Management.
To access Treasurys, investors can buy individual issues via TreasuryDirect or over the counter via a broker. A common strategy is constructing a Treasury bond “ladder” of various issues with staggered maturities, which can provide greater diversification and lower interest rate risk.
“Though not exactly the same as an individual Laddered Bond Approach, target date maturity bond ETFs like IBTE can be a very efficient, low-cost way of implementing a similar strategy for the right account size,” Huszczo says. This unique ETF only holds U.S. Treasury bonds maturing between Jan. 1, 2024, and Dec. 15, 2024. Once 2025 rolls around, IBTE will liquidate and pay out its net asset value to investors.
The main benefit of a defined-maturity Treasury bond ETF like IBTE compared to individual bond issues is the ability to receive monthly distributions. While Treasury bonds usually pay interest income on a semi-annual basis, IBTE makes monthly payments. Investors also benefit from the liquidity of the ETF structure and greater transparency thanks to IBTE’s daily disclosure of portfolio metrics and holdings.
The Treasury ETF has an average yield to maturity of 5.1%.