Short Term US Treasury Bonds Explained

Short term US Treasury bonds are a type of investment where the government borrows money from you, the investor, for a short period of time. They are issued by the US Department of the Treasury.

These bonds typically have a maturity period of one year or less, making them a low-risk investment option. They are also backed by the full faith and credit of the US government.

The yield on short term US Treasury bonds is generally lower than other types of investments, but they are considered to be very safe. This is because they are backed by the government's credit and are virtually risk-free.

Investors can purchase short term US Treasury bonds directly from the Treasury Department's website or through a bank or broker.

Bonds are a type of investment that can provide current income with relatively low risk.

Short-term bonds have maturities of about one to three years, making them less sensitive to changes in interest rates than bonds with longer maturity dates.

They're inherently safer than other types of securities, such as stocks, and rank higher in the capital structure, meaning their owners are among the first to be paid in the event of the issuer's bankruptcy.

Short-term bonds can be either taxable or tax-exempt, but in this article, we'll focus on taxable short-term bonds.

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Bonds are a type of fixed-income security, which means they provide regular interest payments to investors.

These securities typically have a maturity date, which is the date when the bond's principal amount is repaid to the investor.

Bonds are considered safer than stocks because they rank higher in the capital structure, meaning their owners are among the first to be paid in the event of the issuer's bankruptcy.

Short-term bonds, in particular, are less sensitive to changes in interest rates, generally having maturities of one to three years.

They can be either taxable or tax-exempt, but in this article, we'll focus on taxable bonds.

Bonds provide a relatively stable source of income for investors, which can be attractive in uncertain economic times.

Short-term bonds can be a great way to generate current income with relatively low risk. They're a good choice for many investors' portfolios.

One of the main advantages of short-term bonds is their ability to reduce volatility in a portfolio. In fact, they've generated relatively low returns over the past 20 years, but with less volatility than any other asset class except cash.

Short-term bonds are subject to two main types of risk: interest-rate risk and credit risk. Interest-rate risk occurs when bond prices and market interest rates move in opposite directions, causing short-term bonds to lose value when interest rates rise.

Fortunately, the short maturities of short-term bonds mean their losses are more muted than those of longer-term instruments. This makes them a relatively safe way to save up for shorter-term goals.

There are two main ways to invest in short-term bonds: by purchasing individual bonds or by purchasing a fund. Purchasing individual bonds can be appealing, but it's not the most cost-effective option.

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Here are the main differences between individual bonds and bond funds:

For most investors, broadly diversified index funds are the easiest and least expensive way to invest in short-term bonds.

Investing in short-term US Treasury bonds can be a great way to earn current income with relatively low risk. You can do this by purchasing individual bonds or by investing in a fund.

If you choose to purchase individual bonds, you can collect your semiannual interest payments until the bond's maturity date, when you'll get the bond's principal value back. This approach is easy to implement for short-term Treasury notes and bills, which are widely available on most major brokerage platforms.

However, purchasing individual bonds can come with higher trading costs in the form of bid-ask spreads. To avoid this, you can invest in a mutual fund or exchange-traded fund, which offers lower trading costs and broader diversification across many different bonds and bond sectors.

There are three main short-term bond categories: ultrashort bond, short-term bond, and short-term government bond. All three are relatively safe, but the ultrashort category is the most conservative.

If you're buying an individual bond, it makes sense to match up the bond's maturity date with when you'll need to tap into the assets. This ensures you receive the bond's full par value at maturity.

To get the most out of your short-term bond investment, consider the following:

Here are some general guidelines for investing in short-term bonds:

Overall, short-term bonds can be a good choice for many investors' portfolios, especially those looking to earn current income with relatively low risk.

Short-term US Treasury bonds are generally considered a low-risk investment, but like any bond, they're not immune to risk. Historically, they've lost as much as 7% during periods of rising interest rates.

Short-term bonds are subject to two main types of risk: interest-rate risk and credit risk. Interest-rate risk means that bond prices and market interest rates move in opposite directions, causing short-term bonds to lose value when interest rates rise.

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The good news is that their short maturities make their losses more muted than those of longer-term instruments. Credit risk, the risk that a company won't be able to repay its debt, can also be an issue for corporate bonds, but it's less of a concern for US Treasury bonds.

Here's a summary of the risk and performance of short-term bonds:

As you can see, short-term bonds have been subject to slightly more downside risk compared with other short-term categories. However, their losses have been more limited than those of longer-term instruments.

Historically, short-term bonds have lost as much as about 7% during periods of rising interest rates.

The table below shows that the short-term bond Morningstar Category has been subject to slightly more downside risk compared with other short-term categories.

Ultrashort bond funds haven't been immune to risk, although their losses have been more limited, especially compared to short-term government and short-term bond funds.

In 2021, inflation began rising sharply, causing short-term government, short-term bond, and ultrashort bond funds to start losing ground.

The Federal Reserve repeatedly hiked interest rates in 2022 to try and tame stubbornly high inflation, resulting in continued losses for these funds.

Risk and Drawdown Stats (Oct. 1, 2014 - Present) are crucial to understanding the potential volatility of your investments.

The standard deviation of Short Government investments since Oct. 1, 2014, is 1.70. This means that these investments have experienced a significant amount of price fluctuation.

The standard deviation of Short-Term Bond investments since Oct. 1, 2014, is 2.26, indicating even more price volatility compared to Short Government investments.

The standard deviation of Ultrashort Bond investments since Oct. 1, 2014, is 1.12, showing the lowest level of price fluctuation among the three investment types.

Here's a breakdown of the maximum drawdown for each investment category since Oct. 1, 2014:

Short-term bonds are a great way to generate current income with relatively low risk, making them a good choice for many investors' portfolios.

Their low returns are offset by their low volatility, making them a more stable option than other asset classes.

You can invest in short-term bonds by purchasing individual bonds or through a fund, which offers lower trading costs, professional management, and broader diversification.

A broadly diversified index fund is often the easiest and least expensive way to invest in short-term bonds.

Investing in bonds can be a great way to generate current income with relatively low risk. Short-term bonds are a good choice for many investors' portfolios because they can provide a stable source of income.

The main advantage of short-term bonds is their ability to generate current income with relatively low risk. They can be a good choice for many investors' portfolios because they court less volatility than any other asset class except cash.

There are two main ways to invest in short-term bonds: by purchasing individual bonds or by purchasing a fund. Purchasing individual bonds can be an appealing option because you simply collect your semiannual interest until the bond's maturity date when you'll get the bond's principal value back.

Investors can avoid the drawbacks of purchasing individual bonds, such as higher trading costs, by getting short-term bond exposure with a mutual fund or exchange-traded fund. The advantages of using a fund include lower trading costs, professional management, and broader diversification across many different bonds and bond sectors.

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For most investors, broadly diversified index funds are the easiest and least expensive way to invest in short-term bonds. Investors in actively managed short-term bond funds pony up annual expenses of about 60 basis points on average, but the typical passively managed fund charges less than a fifth of that.

Short-term bonds are suitable as core holdings that could make up a significant portion of your portfolio, especially if you're saving up for a short-term goal. If you're simply looking for broad-based bond exposure and have a time horizon of at least two to six years, you may not need a dedicated short-term bond fund.

Here are the three main short-term bond categories: ultrashort bond, short-term bond, and short-term government bond. All three are relatively safe, but the ultrashort category is the most conservative.

A large-cap stock fund or international-stock fund could be a logical addition to your portfolio if you've already added a short-term bond fund. This is because bond funds typically court less risk, while stock funds are better growth engines over time.

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Daily Rates can be a bit confusing, but let's break it down simply. The interest rate on a bond is fixed at the time of purchase and remains the same until maturity. This rate is expressed as a percentage of the face value of the bond.

The coupon rate is the rate at which interest is paid periodically, typically semi-annually or annually. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, you'll receive $25 in interest every six months.

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As you explore the world of short-term US Treasury bonds, having the right tools and analysis can make all the difference.

The ACF Yield is a key metric to consider, providing an indication of an ETF's yield and duration for a given market price. It's calculated using the yield to worst methodology, which assumes a bond's cash flows occur at the call date or maturity, whichever results in the lowest yield.

For instance, as of January 3rd, 2025, an ETF priced at $110.16 has an ACF Yield to Worst of 4.31%. This is a significant figure to keep in mind when making investment decisions.

Modified Duration is another important metric to consider, measuring the sensitivity of a bond's price to changes in interest rates. As of January 3rd, 2025, the Modified Duration for this ETF is 0.26 years.

Here's a key comparison to keep in mind: the ACF Yield (4.31%) is spread over the 0.25 yr Treasury Yield (4.30%), resulting in a spread of +0 bps. This is a crucial detail to consider when evaluating the attractiveness of this ETF.