Taking advantage of the high interest rate environment



We all want maximum return with less risk.

To find reasonable returns in the capital markets, you need to understand what kind of macrocycle the economy is in. We are currently in a period of inflation and high debt, creating an environment where stocks are unable to gain traction to return to the bull market, making the market more susceptible to rising. Trading rather than investing.

Interest rates have risen from nearly zero to over 5.5%, resulting in problems with mortgage rates, credit card finance charges, corporate and government borrowing problems, and many others.

High interest rate environments are often bearish for stocks, and investors typically see lower returns on their stock portfolios. Investors looking for bonds can earn better returns during this period because current interest rates are high and often offer positive real interest rates (yields higher than inflation).

In contrast, a low interest rate environment is bullish for stocks, and investors typically expect returns on their stock portfolios to improve. Investors looking for bonds struggle during this time because current interest rates are low, often resulting in negative real interest rates (yields lower than the rate of inflation).

Many people complain about a bear market in interest rates, but while some people avoid the interest rate market, there are also great opportunities to take advantage of it. Let’s take a look at these opportunities and the means available to help you achieve your bottom line. Next, we will delve into the nuances of each product and explain the advantages and disadvantages of each.

Physical government bonds or government bond exchange-traded funds (ETFs)

Two popular securities that allow investors to participate in the interest rate arena are physical government bonds offered by governments and ETFs traded on stock exchanges through brokerage firms. What are the advantages and differences between the two:

cash government bonds

  • Maturity and yield: Cash government bonds come in a variety of maturities, ranging from short-term (such as Treasury bills) to long-term (such as Treasury bonds and Treasury bonds). If you have a specific investment period or yield goal, you can choose the individual securities that best suit your goals.
  • safety: U.S. Treasury securities are considered one of the safest investments because they are fully backed by the faith and credit of the U.S. government. Investing in physical government bonds allows you to hold them to maturity and ensure that your principal and accrued interest will be repaid.
  • Liquidity: You can buy and sell individual Treasury securities directly through the U.S. Treasury website, Treasury Direct, primary dealers, and the secondary market, providing a high level of liquidity, especially for Treasury bills.
  • Control: When you invest in individual government bonds, you have more control over the composition of your portfolio and can tailor it to your needs.

Investing in government bond ETFs:

  • Diversification: Treasury ETFs pool a variety of Treasury securities and provide instant diversification across multiple maturities, potentially spreading risk and reducing the impact of interest rate fluctuations.
  • Convenience: Because ETFs trade like stocks on a stock exchange, they are easier to manage and buy and sell during market hours than buying and managing individual securities.
  • Interest rate risk: Government bond ETFs, like individual government bonds, are subject to interest rate risk. However, you may not have the same control over maturity dates as you would when investing in individual securities.

Understanding government bond ETFs

While Treasury ETFs may be convenient for investors, they are very different from physical Treasuries. The most notable difference is that ETFs do not pay interest, unlike cash Treasuries. The only way to make money from a Treasury ETF is if your capital appreciates. Stock prices must rise.

Investors may buy U.S. Treasury ETFs because they look “cheap” after prices fall. However, just like stock prices fall, Treasury ETFs could fall even further than their current prices. Investors will have to wait until prices recover before making profits from buying ETFs. No one knows how high yields will go or where Treasury ETFs will bottom.

ETFs traded in taxable accounts are subject to federal, state, and local taxes and short-term capital gains if held for less than one year.

Like other exchange-traded ETFs, the U.S. Treasury ETF has a management fee built into its stock price.

Many investors will earn higher returns in a bull market for interest rates, where there is greater opportunity for capital appreciation. Some U.S. Treasury reverse ETFs rise in value when prices fall, but investors should be aware that many use 2x to 3x leverage.

A more logical approach to government bond investing

Purchasing cash Treasury bills, notes, or bonds has many advantages over Treasury ETFs. The most obvious benefit is that as long as you hold it to maturity, you’ll earn interest no matter where interest rates go and you won’t lose your principal. An often overlooked feature of earning interest is making money on weekends and holidays with a cash treasury. Try it with ETFs when the market is closed.

TreasuryDirect is a popular platform for purchasing and managing U.S. Treasury securities, including Treasury bills, notes, bonds, and inflation-protected securities (TIPS). Like any other financial service, it has its own pros and cons.

Strong Points:

  • Safety and security: U.S. Treasury securities are backed by the full faith and credit of the U.S. government and are among the safest investments available. When you purchase through TreasuryDirect, you eliminate the risk of trading with a third-party broker.
  • It costs nothing: There are no fees when purchasing or holding Treasury securities through TreasuryDirect. These purchases are made directly from the U.S. government, which can result in cost savings compared to purchasing through a broker using the secondary market, which has a bid-ask spread. Some brokers allow you to place buy trades in the Treasury Direct Auction process. This article will discuss this in more detail.
  • Convenience: TreasuryDirect allows you to manage your Treasury investments online, including reinvesting and redeeming securities. It is a user-friendly platform that simplifies the purchase and management of Treasury bills.
  • Automatic reinvestment: You can set up automatic reinvestment of maturing securities, making it easy to reinvest your funds into new bonds without manual intervention.


  • Lack of diversification: U.S. Treasuries are safe, but may offer lower returns than other investments such as stocks. To build a diversified investment portfolio, you may need to look beyond Treasury securities.
  • Selling principal risk before maturity: Treasury bills have a fixed maturity, and if you need to sell a note, note, or bond before maturity, you must do so in the secondary market, and if interest rates rise (prices fall) may result in capital loss. After purchasing securities.
  • Account setup: Setting up and managing a TreasuryDirect account may involve paperwork and procedures that may be inconvenient for some investors. These accounts are voluntary and investors must monitor their investments and activities.

What you need to know about Treasury Direct can save you stress

Whether a TreasuryDirect account or a brokerage account that trades government bonds is better for you depends on your financial goals, preferences, and needs. Both options have advantages and disadvantages.

If an investor only buys Treasury bills, Treasury Direct is the best option for self-directed investors. Because the investment period is so short, investors will probably not sell before maturity.

However, assume that the investor invests in Treasury bills or bonds with maturities between 2 and 30 years. In that case, it is more likely that the Treasury will need to be sold before maturity.

Treasury Direct has an effective and efficient way to buy government bonds. But they cannot sell government bonds. To sell Treasury marketable securities, it’s best to work through a bank, broker, or dealer. For this, the investor needs to transfer the treasury to the above-mentioned person for sale in the liquid secondary market.

The process for transferring Treasury securities for sale from the Treasury Direct website is as follows:

To transfer securities to your bank, broker, or dealer, you will need the following information from them:

  • Financial institution wire name
  • The financial institution’s routing number (ABA number)
  • Agent or broker name and phone number
  • Name and account number of the account to which the securities will be sent

Once you have that information:

  • Go to your TreasuryDirect account.
  • Select the Direct Management tab.
  • Identify the securities to be transferred.
  • Select “External Transfer”.
  • Open the link for FS Form 5511 “TreasuryDirect Transfer Request.”
  • Fill in the required information and follow the instructions on the form.

To complete this process, you must mail the 5511 form to Treasury Direct. Treasury Direct is flooded with investors who want to buy Treasury securities. The normal turnaround time was 13 weeks. Currently, investors are waiting up to 19 weeks.

To resolve this issue, you should purchase Treasury transactions in your stock brokerage account that you believe may be sold before maturity. Selling Treasury bills from this account is as easy as selling stocks. Once you notify your brokerage firm and place an order to sell Treasury securities, the transaction is completed in seconds.

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As of the date of publication, Don Dawson held positions in USTM6.RT, USTM3.RT and USTM1.RT. All information and data in this article is for informational purposes only. For more information, please see his Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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