Section 1.1: The Case for Treasury Bonds

Treasury Bonds are renowned for providing the safest yields globally, thanks to the backing of the U.S. government. If you seek secure returns, look no further than U.S. Treasury Bonds, which are available in various maturities ranging from 4 weeks to 30 years.

Creating a Treasury Bond ladder can help shield you from abrupt interest rate fluctuations. For instance, your ladder could include bonds with different maturities, such as 1-year, 5-year, and 10-year bonds, each with varying yields (e.g., a 5-year bond at 4% and another at 4.5%). You can buy Treasury Bonds directly through the U.S. Government at TreasuryDirect.gov or opt to purchase them via a brokerage for added convenience.

Section 1.2: Why Consider Treasury Bond Funds?

Global investors flock to U.S. Treasuries, giving you a broad selection of options for your portfolio. Treasury Bond Funds typically differentiate based on duration, with popular options including the Vanguard Long-Term Bond Fund (BLV) and the iShares 20+ Treasury ETF (TLT).

I favor long-term bonds because they allow me to secure attractive rates without having to revisit them frequently. However, other investors may prefer shorter durations, like 3-month (TBIL), 1-3 years (VGSH), or 5-year (UFIV) bonds. The stock market allows you to pinpoint the exact Treasury Bonds you want, but what makes Treasury Bond Funds appealing compared to individual Treasury Bonds?

Most bond funds distribute payments monthly, which is advantageous as you approach retirement. Monthly income is beneficial for managing regular expenses, while individual Treasury Bonds typically pay interest semi-annually. If you dollar-cost average into Treasury Bonds over a year, your payments will arrive in February, May, August, and November. Keeping track of your individual Treasury Bonds is vital to avoid missing payments, and the TreasuryDirect website is useful for monitoring these bonds, though it can become cumbersome with more than 20 issues.

Section 1.3: Tax Implications

Interest payments and non-qualified dividends from bonds are subject to taxation at your effective tax rate, qualifying as ordinary income. However, individual bonds enjoy a notable tax benefit: they are exempt from state-level taxation, making them particularly advantageous in high-tax regions like California and New York.

In general, Treasury Bond Funds yield non-qualified dividends instead of interest, creating taxable business income. Therefore, it's wise to conduct thorough research into municipal bond funds for potential tax benefits.

Section 2.1: When to Use Bond Funds

Bond funds can be an excellent choice for those who prefer not to manage individual bonds. They allow for easy dollar-cost averaging through platforms like SoFi, Cash App, and STASH. You can easily monitor the value of your bond funds, whereas individual bonds maintain the same value until sold, at which point their market value can fluctuate based on various factors, including yields and duration.

Treasury Bond Funds are also suitable for tax-advantaged accounts such as Roth IRAs, Health Savings Accounts, and 529 plans.

Section 2.2: When to Opt for Individual Bonds

Individual bonds are ideal for your Tier 2 and Tier 3 emergency funds. It’s wise to maintain 3-6 months of savings in a high-yield savings account or certificates of deposit. However, once you exceed that amount, seeking a decent yield becomes essential. Individual Treasury Bonds can serve as a secure storage option for 1-2 years of savings.

Bond values typically increase when stock prices decline. Ideally, during a recession, the Federal Reserve reduces rates, which can enhance the value of your Treasury Bonds. For instance, if you possess 5-year Bonds yielding 4.5% and rates decrease to 2%, the value of your bonds would rise. While this is the theory, market dynamics can vary. Nevertheless, utilizing bond ladders and remaining informed about market trends can yield positive results with Treasury Bonds.