Why Use Limited U.S. Treasuries in a Portfolio?
U.S. treasuries include U.S. government treasury bonds, which have long-term maturities of 10 years or more; treasury notes, which have medium maturities of one to 10 years; and treasury bills, which have short maturities of one month to six months.
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Diversification
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Treasuries (with the exception of treasury bills, which are discounted to face value) are a good addition to a portfolio because they are a safe fixed-income investment with which to diversify a portfolio. Compared to stocks and commodities, treasuries are considered to be a low credit risk because the U.S. government issues them. They also have a slight negative correlation with the stock markets. In other words, if the stock markets fall, the bond markets rise and vice versa.
Maturity Features
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Different types of government securities have diverse maturity terms. Therefore, an investor should be careful as to which U.S. treasuries are included in his portfolio. Generally, the short maturities (treasury bills) have a lower yield than the longer maturities (treasury bonds). So the investor has to decide whether to invest in long-term securities or short-term securities. He should at least limit his investment in short-term treasury bills because every few months he will be forced to look around and re-invest the proceeds of the maturing bills in another asset.
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Considerations
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Although U.S. Treasuries are pretty much credit risk free, they are still subject to interest rate risk. Therefore, the investor has to balance between investing in high yield bonds and low yield bills. If interest rates fall and therefore yields fall, the investor will have to sell his U.S. Treasuries in the open market. If he has invested a lot of funds in bonds, he has to re-invest the money he receives from the sale of the bonds in another fixed income asset to keep the shape of his portfolio at its optimum level. Therefore, it is good policy to limit the amount of fixed income securities in a portfolio.
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References
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