Bonds #23: Yield Pickup: Extending Treasuries

In the previous article, we looked at swapping, and saw that we might have good reasons to sell a bond we owned, and to buy another with some improved characteristic. You could improve on the bond’s yield, buy one with a higher credit rating, or buy one with a shorter maturity, which would give you more cash-like freedom.

The most common reason that you might want to sell a bond you own and buy another is to increase the yield you will earn.

Over time, you will get MORE MONEY for your investment!

How would you go about this?

One way is to sell a short-term bond and buy one with a longer maturity date.

First, look at the list of your bonds that you get from your broker. See if you have more “short-term” bonds than you really need.

You might have several bonds that are less than two years away from their maturity date, and could be an easy source of emergency cash.

But you foresee no unusual shortage of cash, and YOU are a wise woman, always prepared for a “rainy day”. You keep several months worth of cash in a money market account!

These bonds are part of your retirement fund, and you want them to earn as much as possible.

Generally, short-term investments like money-market accounts or bank CD’s that tie up your cash for a short time will earn you less than a longer-term investment. You deserve to be paid more if you are willing to tie up your hard-earned cash for a longer period!

Maybe you own a 6-month Treasury bond, and want to replace it with another of these AAA government-guaranteed issues, maybe maturing in 10 years.

Call your broker and discuss swapping your short-term issue for one with a longer maturity date. Before agreeing to ANYTHING, ask what the yield would be on your sale, and what it might be for your purchase. And be sure to ask what those figures are, AFTER any brokerage commissions.

Right now, ignoring any fees, the yield on a 6-month Treasury is about 6% and the yield on the 10-year Treasury is near 5.73%.

WHAT?!

Usually, you should be able to improve your yield. If not, STOP.

There ARE times (like the last 6 months) when the Treasury market pays investors LESS for long-term bonds. This time, much of it is due to the Federal Reserve, which has been raising SHORT-TERM rates in order to slow the economy. (Now you know what Alan Greenspan does!)

So, if you’re NOT going to get PAID MORE for buying a longer Treasury bond, why would you?

You wouldn’t.

(Now, if you could foresee the financial markets and be sure that the yields on 10-year bonds are actually sky-high and headed way down, then you might be tempted. And Mr. Greenspan would worry about his job security.)

But, normally, if there is no benefit to buying a longer bond at this time, the best course would be to wait. Your bond will mature, and you will have saved the cost of selling it. At that point, see if the yield curve returns to “normal” and you can invest at a yield higher than money market rates.

If not, wait a little longer.

Sometimes, common sense and patience prevail.

But, there ARE ways to improve the yield on your Treasury bond, if you are willing to give up the ultra-quality of a government issue and consider replacing it with a high-quality, investment-grade corporate bond.

Next: Yield Pickup with Corporates!