Investing Cases for Long-Term and Short-Term Treasury Notes

Long-term and short-term bonds, particularly safe haven government options like Treasury notes, can give portfolios the fixed income exposure they require.

Which one is best for an investor? It depends what they’re looking for.

“All else being equal, a bond with a longer maturity usually will pay a higher interest rate than a shorter-term bond,” a CNN Money article explained. “For example, 30-year Treasury bonds often pay a full percentage point or two more interest than five-year Treasury notes.”

“The reason: A longer-term bond carries greater risk that higher inflation could reduce the value of payments, as well as greater risk that higher overall interest rates could cause the bond’s price to fall,” the article added. “Bonds with maturities of one to 10 years are sufficient for most long-term investors. They yield more than shorter-term bonds and are less volatile than longer-term issues.”

Fixed income investors looking for a long-term Treasury option can consider the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT). With its paltry expense ratio of just 0.05%, cost-conscious fixed income investors have the fund they’re looking for in VGLT.

VGLT seeks to track the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Long Treasury Bond Index.

This index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds), with maturities greater than 10 years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

The Flip Side of the Yield Curve

On the shorter side of the yield curve, getting less duration risk can protect fixed income investors should rates unexpectedly rise. At the current time, the Federal Reserve is looking to stand pat on raising rates for at least another year. Short-term bonds can offer investors protection should the Fed reverse course.

One option can be had with the Vanguard Short-Term Treasury ETF (VGSH). This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.

Overall, VGSH:

  • Seeks to provide current income with modest price fluctuation.
  • Invests primarily in high-quality (investment-grade) U.S. Treasury bonds.
  • Maintains a dollar-weighted average maturity of 1 to 3 years.

For more news, information, and strategy, visit the Fixed Income Channel.