How You Could “Lose Money” in Treasuries

Dear Reader,

This is Dylan Jovine with Behind the Markets.

Happy Monday. What a great day it is to be alive.

Today I want to talk about something that I think is one of the most misunderstood ideas in investing: the idea that US Treasuries are risk-free.

I was talking to a buddy of mine this weekend. He's in long-term Treasuries — no stocks, just bonds. And he said to me, "You can't lose money in Treasuries."

I said, "Actually, it depends on how you define losing money."

The Seesaw

Here's the first thing you need to understand. The longer a bond's maturity, the riskier it is. Short-term bonds — under a year — barely move. But long-dated bonds, 10, 20, 30 years out, they swing wide. There's a seesaw relationship between bond prices and interest rates.

Interest rates go up, bond prices go down. Interest rates go down, bond prices go up. Full stop.

So here's one very real way you can lose money in bonds. Say you own a 20-year Treasury and you need to sell it before it matures. Maybe somebody in your family gets into trouble. Maybe you have unexpected costs. If interest rates have gone up since you bought that bond, the price is lower. You will get less than you paid. That's a loss.

My buddy said, "Well, I'm not going to sell it." And I said, fair enough. But no plan survives first contact. That's not how life works in my experience.

The More Insidious Risk

Even if you hold to maturity and get every dollar back, there's a second risk that's quieter and more dangerous: inflation.

If you're earning 3% on a bond and inflation is running at 3%, you are treading water. That's it. You're not getting ahead. You're just staying even — and most years, you're not even doing that.

Think about it this way. I give my kids a $50 bill and it feels like a $20. When I was in my twenties, a $20 in my pocket made me feel like the man. Now a $50 is basically the same thing. A million dollars in 20 years is going to feel a lot more like $500,000 does today. Bonds trick people into thinking they're safe when they're actually just slowly falling behind.

What I Do Instead

I keep my money in short-term Treasury money market funds. The one I personally use is SNOXX — it's the Schwab fund, and it only buys short-duration US Treasuries, under a year. Much less volatility. You buy it at a dollar, the trade clears the next day, and if you need to sell on Monday your money is free on Tuesday.

Short duration means the fund almost never breaks a dollar. And because they're running laddered portfolios — constantly rolling different maturity levels — there's always cash coming in and going out. These managers know exactly what they're doing.

My advice to my buddy was simple.

You will still have a million dollars in 20 years. But if you put that same money into something growing at a real rate above inflation, you might have two or three million. Because a million dollars in 20 years, at the rate we're going, is going to be worth about $500,000 in today's money.

Beyond money markets, I like real estate. Hard assets. You can raise rents above the inflation rate, which is exactly why smart money has been moving into them. If you're not going to own stocks, those are my two favorite places to be.

Just wanted to share that. Consider it a public service announcement.

Have a wonderful day. I'll see you tomorrow.

“The Buck Stops Here,”