THE TREASURY market is the largest sector of the U.S. bond market. But it isn’t important simply because of its size. The Treasury market also provides investors with a crucial number: the yield on the 10-year Treasury note. This benchmark rate is used for all kinds of purposes, including figuring out a fair price for corporate bonds, valuing stocks, forecasting inflation and pricing mortgages.
Why is the 10-year Treasury so important? Many investors view it as the risk-free rate. In other words, if no other investment seems compelling, you could always buy 10-year Treasurys and collect the stated interest rate for the next decade, confident that there’s little risk that you won’t get your regular interest payments and that you won’t get your principal back upon maturity.
Even though your nominal return is pretty much guaranteed, there remains a big risk: inflation. That explains the appeal of inflation-indexed Treasury bonds, discussed next.
Not so worried about inflation and happy to buy regular Treasury bonds? While there are mutual funds that invest in Treasurys, you may want to avoid fund expenses and instead purchase individual Treasury bonds directly from the government. That does, however, come with drawbacks. A fund allows you to reinvest your regular interest payments, no matter how small, in additional fund shares. But to reinvest in individual Treasury bonds, you’ll have to wait until you have accumulated $100 in interest and until the next auction occurs. It’s also more of a hassle to sell individual Treasury bonds.
Next: Inflation Treasurys
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