War in Iran, Inflation and AI Angst: Should Investors Increase Their Safety?
Investors are increasingly turning toward the stability and attractive yields of Treasury securities and specialized bond ETFs as reliable ways to protect their capital. Here's what you need to know.
Usually, there are crosscurrents in financial markets, but today's seem particularly demanding.
The war in Iran seems always there, affecting short-term policies while being a longer-term problem. We don't know where it will go, just that the on-again, off-again intensity of the war affects the stock and bond markets.
Adding to this scenario is AI. Artificial intelligence is very promising, but it's hard to determine who the big winners are. The staggering sums of money that companies are investing in AI is worrying many investors, while the earnings that AI-related companies are reporting are impressive.
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But will that growth continue and at what pace? This clouds the longer-term outlook.
Some investors are throwing their hands in the air and selling all or some of their equity holdings.
Here's an option: Fixed income
Meanwhile, fixed income is attractive, with rates having risen. For example, the 30-year Treasury bond is back up to about 5%, a number that hasn't been seen except for brief periods since July 2007.
The U.S. Treasury securities market has grown substantially, and individual investors have participated in its growth. Treasuries carry the U.S. government guarantee of timely payment of principal and interest. The interest that U.S. Treasuries pay is exempt from state and local taxes. This makes them the highest-quality investment of their type.
So, what is the best way to buy Treasury securities?
The go-to way to trade Treasuries used to be to visit TreasuryDirect.gov, but not anymore. The much larger Treasury market has flooded TreasuryDirect and made it impossible for the site to keep up with demand.
There are many reasons for this growth, including the increased share of insurance companies, money market instruments and broker-dealers buying Treasuries; the Federal Reserve shrinking its balance sheet; and pension funds and other institutions increasing their holdings.
The result is that the site recently reported delays in its response to fill mail requests. Among other delays, it could take nine months to complete converting paper savings bonds into electronic bonds. To cash paper savings bonds could take at least three months.
And requests to find lost, stolen or missing savings bonds would take a minimum of 11 months to process.
More bond trading
Bond trading volume is probably going to increase. Kevin McPartland of Crisil Coalition Greenwich reported in April that corporate bond market trading hit an average of $65 billion traded per day in March.
This was a record, surpassing the volume of the previous month, which was also a record.
Also, on the last day of March, $108 billion was traded, a single-day record for bond trading.
McPartland also pointed out that this higher bond volume was partly being facilitated by the advanced electronics used by institutional traders.
Another factor is that developed execution management systems are being employed, along with more standardized post-trade processes.
He pointed out that even though the systems and tools are more advanced, good people handling the processes are still needed. "Traders want a human element even when trading electronically," he wrote.
How to buy and sell fixed income, including Treasuries
Brokerage firms have always offered fixed-income securities, including Treasuries, but they have improved the ways for investors to buy and sell, even for small amounts. For example, the electronic trading platform Public has secondary market liquidity, an easy-to-navigate interface and other advantages.
Although bonds usually trade in $1,000 increments, Public trades corporate bonds and Treasuries in as few as $100 increments.
Investors can also build ladders at Public, spreading maturity dates to match investor needs. This can be done with Treasuries or bonds. Investors can call Public anytime, day or night, for support.
Another broker, Charles Schwab, advises that certificates of deposit (CDs) and Treasury bonds are two of the safest fixed-income investments you can make. And both can add diversity to your portfolio, generate income and protect principal. (Schwab also points out that investors can lose money in these securities.)
Schwab, like other brokerages, has fixed-income specialists available for calls from investors, as well as in-house traders who can be contacted either by phone or online. Schwab additionally builds taxable and tax-free Treasury and bond ladders for investors.
Fidelity Investments created a fixed-income site that offers a wide range of bonds, Treasuries and other offerings — 75,000 to 100,000 new issues and secondary securities are offered.
Fidelity charges only $1 markup or markdown for bonds traded in the secondary market; it charges no fee for online U.S. Treasuries.
For qualified clients, it offers help from fixed-income specialists and provides a high-net-worth desk to help investors with bonds and CDs.
Interactive Brokers (IBKR) is another broker committed to upgrading bond trading to a new standard and doing it on a worldwide basis.
On its platform, investors can invest globally in many financial securities, including equities, options, currencies, futures, bonds and funds. Accounts can be funded in many currencies, and trades can be denominated in different currencies. Market data can be accessed six days a week, 24 hours a day.
Thomas Frank of IBKR said, "We aim to provide our clients with the most flexible and comprehensive trading environment possible."
To that end, IBKR offers over 1 million corporate, municipal, non-U.S. sovereign bonds and Treasuries. These are offered without markups or built-in spreads.
ETFs that are unique
The professionals at investment management firm F/m Investments believe that investors have sent a clear message — they want safety, and they want to be shielded against inflation.
According to F/m, that's why investors poured $25 billion into ultra-short-duration U.S. Treasury ETFs. The funds started coming into the ETFs — BIL, SHV, SGOV and TBIL — at the outset of the Iran conflict and took only six weeks to be deposited.
The reason for the investment surge, according to F/m, is that these ETFs pay an attractive rate.
Also, if the conflict raises inflation further, these ETFs can reset soon to receive higher yields. And principal is protected because these securities will fall less than longer-term bonds as a reaction from the market adjustment to the higher rate.
F/m offers investors its single-maturity Treasury ETFs, called the U.S. Benchmark Series. The series makes it possible to buy Treasury ETFs during stock market hours and lock in the current on-the-run yield. On-the-run refers to the securities most recently auctioned. The securities are held only until the next auction, and they are sold, with the proceeds being used to buy a new series being auctioned.
The U.S. Benchmark Series is available in the full maturity range of Treasury bills, bonds and notes. This includes all securities from the 3-month Treasury bill ETF (TBIL) to the 30-year Treasury bond ETF (UTHY).
Treasury yields are attractive, even at the short maturity end: The TBIL yield is 3.54%; UTHY is 4.85%. This yield will change throughout the trading day; the market price will price in changes. The market price of publicly traded Treasuries and other income securities, in an ETF structure or individual securities, will fluctuate, and money can be made or lost.
The U.S. Benchmark Series offers maturity date diversification. As interest rates fluctuate between the series offerings, investors can switch into a higher-yielding Treasury or stay where they are.
The ETF series attempts to pay interest monthly, another advantage over holding individual Treasuries. The expense ratio is reasonable at 0.15% per annum.
Navigating today's volatile markets requires staying informed and being flexible, but whether you choose to buy individual Treasuries through a brokerage or opt for the simplicity of ETFs, there are reliable tools to help you protect your capital and generate steady income.
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