FOR THE MID-TERM, T-BONDS GET TOP MARKS
Investors who don't want to risk stocks or bonds right now may be eyeing the rising yields in money-market mutual funds or bank certificates of deposit. But if you're willing to tie up some cash for two to five years, good old U.S. Treasury bonds look mighty pretty.
Backed by Uncle Sam, treasuries are about as secure an investment as you can make if held to maturity. And currently, yields on two-year T-bonds top 6%, while two-year CDs return 5.5% or less and money-market funds earn almost 4% on average--gaps that have widened since February. The three- and five-year T-bonds yield about 6.3% and 6.8%, respectively. One reason for the differential is that banks have been slow to raise the rates they pay depositors even as the rates they charge borrowers have moved upward since the spring.
A money-market fund would still make more sense for someone who might need instant access to the cash. If you buy a treasury and want the money quickly, you would have to pay a fee on the sale of your bond; Charles Schwab charges a flat $49. You may also suffer a loss of principal if rates have risen.
Treasury securities have the added bonus of not being taxed at the state or local level. They are, however, subject to federal taxes. Investors in higher brackets, particularly those paying above 39%, may want to consider municipal bonds, which usually are exempt from state and federal taxes. The tax benefits on treasuries typically are best for those with a rate of less than 30%.
Investors can buy T-bonds from any Federal Reserve Bank or through a brokerage firm. Buying directly from the government requires at least $5,000 for two- and three-year bonds, $1,000 for five-year notes, and there is no transaction cost. Brokers can sell some securities in smaller amounts, but they charge a commission. Either way, one of the safest investments is also offering some of the best returns.Amy Barrett