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Is there a catch to invest to treasuries close to maturity date? I don't want to lock the money for a long time, b/c the interest rate probably will go up. But I am concern that it's not that simple. Anything to look for?

Thank you so much for your responses. Here is more info that you've asked: I am looking for "catches" where I lose money instead of making them. Such as higher execution price or other hidden costs or price adjustments. (My brokers don't charge commissions for bonds) How far till maturity date I am looking to buy? - probably 1 year max. I am looking to buy US Gov Bonds/Notes/Bills close to the maturity date and hold it till maturity. Here is an example: if I buy this Note: 912828WW6 matures on 7/31/19, YTM - 2.34%, cost $99.81, coupon 1.62% Assumptions (please tell me if I am wrong): I am going to collect 2.34% annually (WTM can be slightly worse) till it matures and then collect $100 at maturity date. % that I am going to collect will be probably pro-rated - I'll have to share it with the seller to make up the time because I'll buy it somewhere between "dividends" dates. Please let me know your thoughts. Thank you all! 🙂

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    How close to maturity date are you looking? The US government does sell 4 week t-bills.
    – mhoran_psprep
    Apr 24, 2019 at 15:00
  • This seems a bit broad to me… Can you be a bit more clear about what "catches" you're worried about?
    – user42405
    Apr 24, 2019 at 15:06
  • T-bills aren't as liquid as cash, but they still are fairly liquid, so you aren't really "locking" the money in, other than risk you're assuming regarding interest rate fluctuations, which aren't very large.
    – Acccumulation
    Apr 24, 2019 at 15:19
  • This may help you to understand Treasuries better: newyorkfed.org/aboutthefed/fedpoint/fed07.html
    – Bob Baerker
    Apr 24, 2019 at 15:33
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    Are you referring to bonds sold by the U.S. government?
    – Chris W. Rea
    Apr 24, 2019 at 15:42

2 Answers 2

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The question seems to be whether you can benefit from the (normally) higher yield of a longer-term bond but limit your risk by buying it close to maturity. The answer is you cannot, because you have to buy the bond at market price, which is based on the current market interest rate associated with the remaining term. Thus, your yield will be different from the yield with which the bond was originally issued. In the case of a stable, upward-sloping yield curve, a bond issued at par value will rise above par as it approaches maturity, then settle back down to par at maturity.

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  • Good answer. There are times when treasuries yield's swell as they approach maturity, and once you include transaction costs their yield is typically lower than market.
    – Pete B.
    Apr 24, 2019 at 16:24
  • Thank you for your answer. I had an assumption that if the current market interest rate goes higher on the same bond type than the coupon's rate of a particular bond - this bond's price goes down and it's usually lower than the face value. (example: bond with a par value $100 and a coupon 1.62% should cost approx $99 with the current YTM of 2.40%). Is it a wrong assumption?
    – GemStone
    Apr 25, 2019 at 14:18
  • @GemStone I think that's roughly correct. Do you see it conflicting with my answer?
    – nanoman
    Apr 25, 2019 at 14:59
  • @nanoman Yep. "a bond issued at par value will rise above par as it approaches maturity, then settle back down to par at maturity." To my understanding it will never be higher than par value if the interest rates go up since the bond was issued. Right?
    – GemStone
    Apr 26, 2019 at 14:08
  • @GemStone A bond's YTM can change due to riding along the yield curve (YC) as time to maturity shrinks, and due to shifts in the YC itself. In that sentence, I assumed the YC is upward-sloping and stable, so YTM decreases as the bond approaches maturity. Yes, if part of the YC itself rises, that could offset or reverse the effect; YTM could rise and price could fall below par. Main point: Regardless of what yield the longer-term bond was issued with, now that it's close to maturity it is priced in today's market for a yield appropriate to the short-term bond that it has become.
    – nanoman
    Apr 29, 2019 at 7:17
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The US government does sell 4 weeks bill, you can go to the secondary market to find an even shorter duration one.

If the amount of cash you have is less than the FDIC insured amount ($250k), then an easier alternative is to just use a high yield/money market account (You can find many at https://www.bankrate.com/banking/money-market/rates/). They pay comparable rate (sometime even better!) to short duration treasury and your money is safe even if the bank fail.

You can also consider using a money market mutual fund or an ETF like this one as a way to invest in short duration bond. They are more liquid, easier to trade, but do charge a fix percentage fee. You'll have to sacrifice a little yield.

Finally if you do have a few million dollars or more that you want to stay in cash equivalent, then I think it makes the most sense to buy short duration t-bills directly. Keep in mind that if you want to trade smaller quantity of t-bills than the counterparty offer (typically face value $100k~$250k) on the secondary market (not an exchange!), usually your order can only get filled at a slightly worse price (as opposed to exchange traded products where a buy/sell market order is guarantee to filled at ask/bid price instantly). In this sense, t-bills are not as liquid as you might have thought.

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  • Thank you so much for your advises. The reason I am not leaning to ETFs or Funds: They fluctuate in price and it is just the same as any other fund or ETF, but with less risk + I'll have to pay management fee there as well - thus I can still lose money. VS. if it's an actual Note/Bond: if I find the one which trades less then face value and hold it till maturity - that's guaranteed! Am I right or am I missing something? :)
    – GemStone
    Apr 25, 2019 at 14:10
  • @GemStone It is guaranteed just like bank CD and saving accounts are guaranteed. The thing you want to care is what is the return it offers. If you plan to hold the bond/note/bill to maturity then yes you don't have to worry about the price fluctuation before the maturity. You might also be interested in bond pricing theory investopedia.com/university/advancedbond/bond-pricing.asp
    – user67084
    Apr 26, 2019 at 1:49
  • Thank you for the link. I'll look at it. Right now I am looking for something with guaranteed return for my cash without locking it for a long time. Considering market forecast for end of 2019 the rates will go up. Good option would be money market fund, if they can give the same return. I am not too familiar with them - how they work and if there are any risks at all. But with Treasury you know the interest you are going to collect, however with Money Market Fund - the income will be floating + you'll have to shell off the management fees for them. :)
    – GemStone
    Apr 26, 2019 at 14:21

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