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Let’s be real: US Treasuries have been the go-to for safety forever. But after a brutal stretch where bonds lost value, and with interest rates where they are, you’re probably wondering – are they still worth it? I’ve been investing for over a decade, and I’ve made plenty of mistakes with bonds. Here’s my take, with no sugarcoating.

The Current Case for US Treasuries

Right now, Treasuries offer yields we haven’t seen in years. Short-term bills are paying around 5%. That’s real income. But more importantly, they’re still the most liquid asset on earth. When markets panic – and they will – Treasuries are where money flows. I’ve seen it happen twice in my career: 2008 and 2020. Both times, Treasuries did their job.

But yield isn’t everything. The total return picture includes price changes. If you hold to maturity, you get your principal back (barring default, which is near-zero for the US). The catch? Inflation eats into purchasing power. After tax and inflation, a 5% nominal yield might be 2% real. Still positive, but not exciting.

My Personal Take: For the cash portion of your portfolio, Treasuries are hard to beat right now. For long-term capital appreciation? Not so much.

What’s Changed? The Real Risks

Interest rate risk is the elephant in the room. If you bought a 10-year bond when rates were 2%, its price fell when rates hit 5%. That’s not theoretical – it happened. Many investors who thought bonds were “safe” got crushed in 2022. The lesson: duration matters. Long-term bonds are not cash equivalents.

Then there’s inflation risk. Even TIPS (Treasury Inflation-Protected Securities) have trade-offs. Their real yield is lower than nominal bonds, and they can be volatile. I used to think TIPS were a no-brainer, but after holding them through a period of falling inflation expectations, I learned they’re not always a hedge.

Opportunity cost is real too. Money in Treasuries isn’t in stocks, real estate, or even high-yield savings accounts that are also paying 5% right now. The difference? Treasuries are state-tax-free, which we’ll get to.

One mistake I made: I loaded up on 30-year bonds thinking rates couldn’t go higher. They did, and my principal dropped 30%. Ouch. Stick with short durations unless you truly understand the risks.

How to Invest in Treasuries Today

You’ve got options, and each has quirks. Here’s how I do it:

Direct Purchase via TreasuryDirect

Buy bills, notes, bonds, and TIPS directly from the government. No fees, but the website is painfully outdated. I use it for iBonds (not technically a Treasury, but close) and 4-week bills rolled automatically. Small hassle, but for simple buying, it works.

ETF or Mutual Fund

Much easier. ETFs like SHY (short-term), IEF (intermediate), and TLT (long-term) give instant diversification. But remember: the share price moves with rates. In a rising rate environment, long-term funds lose value. Short-term funds are less sensitive. I personally use a ladder of individual bonds for my core allocation and a short-term ETF for trading.

Ladder Strategy

Buy bonds of different maturities – say 1, 2, 3, 4, 5 years – and reinvest as each matures. This smooths out yield changes and reduces reinvestment risk. It’s boring, but it works. I’ve been doing this for years; it’s my sleep-well-at-night bucket.

Treasuries vs Other Safe Havens

Asset Current Yield (approx) State Tax Liquidity Rate Risk
3-Month T-Bill 5.3% Exempt Excellent Minimal
10-Year Treasury Note 4.2% Exempt Excellent Moderate
High-Yield Savings 4.5% Taxable Good None
Money Market Fund 5.0% Taxable Excellent None
Gold (ETF) 0% N/A Good Low

Notice the state tax exemption for Treasuries. If you live in a high-tax state like California or New York, that’s a huge edge. A 5% Treasury yields more after-tax than a 5.5% savings account if your state rate is 10%.

Tax Edge: Why State Taxes Matter

This is the part many articles skip. Treasury interest is free from state and local income taxes. That’s a big deal if you’re in a high-tax state. For example, if you’re in California (top rate ~13.3%), a 5% Treasury is equivalent to a 5.76% taxable bond. In New York City, the combined rate can be even higher. I always recommend clients max out Treasuries for their cash allocation when they live in such states.

But don’t forget federal taxes – Treasury income is fully taxable at the federal level. So factor that into your net return.

When Treasuries Make Sense (And When They Don’t)

Scenario 1: The Retiree Seeking Steady Income

If you’re drawing down your portfolio, a ladder of Treasuries up to 5 years out can provide predictable cash flow. The interest won’t fluctuate much, and you can match expenses. I’ve built these ladders for clients who can’t afford principal volatility. They work, especially now with yields above 4%.

Scenario 2: The Young Saver Building an Emergency Fund

Short-term Treasuries (4- to 13-week bills) are perfect for emergency cash. You lose a tiny bit of liquidity compared to a savings account (a few days to settle), but the yield is often higher, and you avoid state taxes. I wish I’d done this earlier instead of letting cash rot in a 1% bank account.

Scenario 3: The Aggressive Growth Investor

If you’re under 40 with a high risk tolerance, Treasuries might be a drag. Opportunity cost is huge over decades. In that case, keep only a small emergency reserve in Treasuries and put the rest in equities. I’ve seen too many young investors pile into long-term bonds thinking “safety” – that’s how you lose out on compounding.

Frequently Asked Questions

With high inflation, won't Treasuries lose purchasing power regardless of yield?
Yes, but the same is true for any nominal asset. The question is relative. Over the last three years, TIPS have only modestly kept up with inflation; long-term nominal bonds have lagged badly. The best inflation hedge for a bond investor is a short duration – reinvest frequently at higher yields. That’s why I stick with bills and short notes until inflation trends down.
Should I buy individual Treasuries or an ETF?
If you intend to hold to maturity, buy individual bonds – you avoid the fund’s ongoing expense ratio and unpredictable NAV. For trading or small amounts, ETFs are fine. The nuance: With individual bonds, you lock in a yield; with funds, your income fluctuates. I use both: a ladder of individual bonds for boring stability, and a short-term bond ETF for my “aggressive cash” slice.
What about TIPS – are they a better choice now?
TIPS give you inflation protection, but their real yields are lower than nominal bonds of the same maturity. For instance, a 5-year TIPS might yield 1.5% real, while a 5-year nominal yields 4.0% – that’s 2.5% breakeven inflation. If inflation averages above 2.5%, TIPS win; below, they lose. I find TIPS less attractive now because breakeven rates already build in moderate inflation. I’d rather take the higher nominal yield and accept some inflation risk, especially for shorter horizons.
Is it a bad idea to buy Treasuries through a brokerage?
Not at all. Most brokers offer Treasuries on their secondary market with low or zero commissions. The spread is usually tight. I use my brokerage for everything except small purchases on TreasuryDirect. The key advantage is instant liquidity – you can sell anytime. The downside? You might get a worse price than if you held to maturity, but that’s the same for any bond. Just watch out for markups on small lots; fresh issues (auction purchases) are cleaner.
For a taxpayer in a high-income tax state, are Treasuries essential?
I’d say highly recommended for cash holdings. Compare a 5% Treasury to a 5% money market fund: if you pay 10% state tax, the money market yields 4.5% after state tax, while the Treasury yields 5% (no state tax). That’s a 50-basis-point edge. It adds up. For bond allocation, Treasuries also offer the same state tax break, but you need to weigh it against credit risk (corporate bonds are state taxable). I typically fill up my fixed income bucket with Treasuries first, then add corporates only for extra yield after accounting for taxes.

*This article reflects my personal investing experience and is not financial advice. Check current yields and your own tax situation before making decisions.