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Understanding Government Bonds and Their Alternatives

Government bonds, also known as Treasury bonds or T-bonds, are issued and backed by the federal government. When you purchase one, you’re essentially lending money to the U.S. Department of the Treasury. In return, you’ll be repaid over time with interest, which is paid at a fixed rate every six months until the bond matures.

Can You Lose Money With Government Bonds?

While it’s always possible to lose money when investing, the likelihood of that happening with a government bond is extremely low. The U.S. government has a strong track record of repaying its debts, making your investment quite secure. However, returns for government bonds are generally lower compared to stocks, ETFs, and mutual funds. For instance, the stock market has historically generated average annual returns of around 10%, whereas the interest rate on 30-year Treasury bonds is currently 3.625%.

Key Bond Terms to Know

• Face value (or par value): The bond’s value when it’s first issued and the amount the bondholder will get back when the bond matures.
• Coupon rate: The interest rate the bond pays, which is typically fixed. An auction process determines the coupon rate and offer price for Treasury bonds.
• Yield: The return generated by the bond based on its current price.

How to Buy and Sell Government Bonds

To buy a Treasury bond, you must place a bid when the bond becomes available via auction. You can do this through TreasuryDirect.gov or a bank, broker, or dealer. Auctions take place four times a year for original issues and eight times a year for reopenings. You can keep government bonds until they mature or sell them at any time through a bank, broker, or dealer. Treasury bonds are available in terms of 20 or 30 years.

Are There Any Other Risks With Government Bonds?

While the risk of losing money on government bonds is minimal, there are other financial risks to consider:

• Lower Returns: Government bonds are low-risk investments that generate modest gains. Diversifying your holdings with a variety of asset classes, including some riskier investments, can help balance your portfolio.
• Inflation: The fixed interest payments from a government bond may not keep up with inflation, especially if you hold the bond for 20 or 30 years.
• Interest Rates: When the federal funds rate increases, bond prices tend to decrease, and vice versa. Holding a bond for decades could expose you to interest rate risks. Diversifying with short-term bonds and equities can help mitigate this risk.

Alternatives to Government Bonds

Given the low yields of government bonds, it’s wise to diversify your investment portfolio with other types of investments. Some alternatives include:

• Treasury Notes: These come in terms of two, three, five, seven, or 10 years, with fixed interest paid every six months. The interest rate on a 10-year note is currently 3.875%.
• Treasury Bills: These have shorter terms ranging from four weeks to one year, with interest paid upon maturity.
• Series I Savings Bonds: These use a combination of fixed and inflation-adjusted interest rates, available in 30-year terms with a current composite rate of 4.30%.
• Series EE Savings Bonds: These can earn interest for up to 30 years, with the value guaranteed to double after 20 years. The current rate is 2.50%.
• Certificates of Deposit (CDs): CDs earn interest over a predetermined period, with terms ranging from three months to five years. Some CD rates are currently around 5.5%. CDs held at banks are FDIC-insured up to $250,000 per depositor, per insured account.
• Money Market Accounts: These accounts earn interest like savings accounts and allow withdrawals via check or debit card. Interest rates are currently over 5%, and accounts are FDIC-insured.
• High-Yield Savings Accounts: These accounts offer higher annual percentage yields (APYs) than traditional savings accounts, with some exceeding 5%. Funds are insured, and withdrawals may be limited.
• Stocks: While individual stock picking is risky, ETFs and mutual funds offer built-in diversification. You can also invest in stocks through retirement accounts like 401(k)s and IRAs.

The Bottom Line

No investment is entirely risk-free, but government bonds are among the safest options available, backed by the full faith of the U.S. government. While gains may lag behind higher-risk investments, government bonds can help diversify your portfolio and provide reliable returns.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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