In today’s current environment of high inflation and rising interest rates, some investors have been left wondering what kinds of assets could perform well under such value-wrecking conditions.
While there are no guarantees where the market is concerned, certain investments have traditionally fared better during periods of increasingly steep price rises.
Indeed, one asset class that has a long track record of doing well when inflation is rising is commodities. Commodities tend to do well when inflation is high because they are physical goods with a limited supply, and, as the prices of other things go up, the value of commodities follows suit.
Another investment sector that’s performed well during periods of high inflation is real estate. This is especially true for rental properties, as tenants are typically responsible for shouldering the burden of any rent increases due to rising inflation.
Moreover, many investors view real estate as a hedge against inflation, as property often appreciates along with the broader economy.
However, commodities and real estate are still relatively high-risk prospects, and they are definitely not the safe haven boltholes you might desire for your money at the present time. In fact, Vanguard’s Real Estate ETF is down nearly 30% this year, and some commodities, such as copper, have seen their prices decline through 2022.
But there is one security that’s tailor-made for times such as these – and that’s US government-issued Treasury notes. These instruments potentially offer protection for your capital and also come with the benefit of providing you with a regular and consistent income stream.
Still, there could be some drawbacks that might make them somewhat less-than-perfect, depending on your own needs and circumstances.
In this article, we’ll examine whether T-notes are the best bet right now or if there is some other option to help insulate your money from the ravages of runaway inflation.
What Are Treasury Notes?
Treasury notes are very similar to Treasury bonds and Treasury bills, differing only in their length to maturity.
Treasury bonds typically mature in 20 or 30 years, Treasury notes anywhere from two to 10 years, and Treasury bills from four weeks to one year.
Additionally, each one of these fixed-income securities offers varying interest rates. With their extended maturity date, bonds tend to offer higher interest rates than Treasury notes, while at the same time, Treasury bills derive their worth from the difference between their face value and purchase value, which investors consider to represent the instrument’s interest.
The US Treasury issues these securities in order to finance the federal government’s spending endeavors, and because they are backed by the full faith and credit of the US government, they are assumed to be one of the safest investments around.
What Makes 2-year Treasury Notes Such A Great Investment?
A significant degree of uncertainty appears to permeate the current macroeconomic climate at the moment. Investors are desperate for some way to mitigate the supposed heightened volatility of the market, and that’s where 2-year Treasury notes can come in.
For instance, these notes offer a fixed rate of interest for the life of the investment, providing some stability during periods of high inflation.
Additionally, 2-year Treasury notes are relatively short-term investments, so they won’t lock up your money for an extended length of time.
Finally, if inflation does go up, you can always cash in your 2-year Treasury Notes and reinvest the proceeds in something that will keep pace with rising prices.
Are Treasury Notes A Safer Bet Than Cash?
It’s generally considered that Treasury notes make for a safer investment than cash when inflation is high. This is because the value of cash decreases when inflation rises, whereas the face value and interest provided by a Treasury note offer at least some positive return.
However, the interest associated with a Treasury note will often lag behind the rate of inflation, especially when prices are escalating at a rapid pace. For instance, the 2-year Treasury rate in early October stood at around 4.1%, which is a long way off the all-item Consumer Price Index of 8.3% for August 2022.
Furthermore, as a fixed-income asset, Treasury rates won’t increase if inflation continues to go up, and the implied purchasing power of your investment will necessarily diminish.
In fact, there are plenty of other factors outside of just inflation that informs the value of a Treasury note, and interest rate risk is an ever-present hazard you’ll have to live with.
That said, if conditions do change, 2-year Treasury notes are extremely liquid assets and can be sold on the secondary market reasonably quickly. Indeed, if your note becomes more valuable to the market because the Federal Reserve decides to cut rates, you may be able to sell your notes for a profit.
Could Stocks Ultimately Outperform Less Risky Investments Such As Treasuries?
Most major exchanges have floundered this year. The S&P 500 is down 21%, Japan’s Nikkei has fallen 7.4%, while in London, the FTSE 100 has lost 6.0% of its value so far in 2022.
On top of that, once you add in the harmful effects of inflation, anyone exposed to the markets over the last 10 months will likely have suffered severe losses.
Despite this, some equity investments have been uncommonly rewarding for shareholders, particularly those that capitalized on the energy crisis precipitated by the war in Ukraine.
Chevron is up a massive 33% year-to-date, and, with OPEC cutting oil outputs, its fortunes will be on the up for quite a while to come.
However, as things stand, most industries still face a difficult future. This will be reflected in company share prices continuing to contract, and, outside of shorting the market, it’s hard to anticipate where any relief will come from for investors in the time ahead.
Conclusion
When choosing where to put your money today, it’s important to consider your own risk tolerance and the time horizon that you’re working towards.
One key advantage of US treasury bonds is that they’re AAA rated by all major credit agencies, meaning there is a very low risk that you won’t get your money back.
But they won’t consistently outperform inflation, nor are they automatically a better alternative to other investment opportunities.
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