Podcast Episode - Suze School: Understanding 30 Year Treasury Bonds


Investing


August 06, 2023

Listen to Podcast Episode:

On this episode of Suze School, Suze explains how 30 Year Treasury Bonds work and why they may be a good investment vehicle for you.


Podcast Transcript:

00:00:00

Robert: Ok, Suze. Are you ready for today's podcast?

00:00:03

Suze: Oh, you bet I am because I'm unstoppable.

00:00:08

Music: Music (in).

00:00:29

Suze: August 6th, 2023. Welcome everybody to the Women and Money podcast and everybody smart enough to listen, Suze O, here. Now

00:00:41

Suze: today's Suze school is going to be about bonds, 30 year treasury bonds to be exact. So get out your Suze notebooks because I really want you to take notes and listen closely to this Suze School because this is an important concept that you need to understand.

00:01:04

Suze: Now, let's start very simply with what is a bond? A bond is a debt instrument

00:01:15

Suze: that simply means you are lending an entity, your money for a specific period of time

00:01:24

Suze: and they pay you an interest rate on that money for the entire time

00:01:31

Suze: until they pay you back. Hopefully the amount that you lent them

00:01:36

Suze: on a specific date in the future, which is known as the maturity date

00:01:44

Suze: for this Suze School. As I said, when I first started, we are simply focusing on treasuries that are issued by the United States government which in theory means you are lending the United States government money, they need money to pay their bills and that money is backed

00:02:09

Suze: by the full faith and credit of the United States government making them supposedly the safest debt instrument that you can buy. Why did I say? Supposedly because we have to admit, don't we, they didn't feel so safe just a bit ago when the debt ceiling was in question

00:02:32

Suze: and that's gonna come up again in just October. So we will see what happens at that time.

00:02:40

Suze: But still they are

00:02:43

Suze: supposedly the safest debt instrument that you can buy. Now, there are three rating services that rate the safety of all bonds

00:03:00

Suze: and these three rating services are known as standard and Poor's Moody's and Fitch. Now, if you go to my Women and Money app and if you haven't downloaded it yet, you might want to do so by going to Apple Apps or Google Play, search for Women and Money.

00:03:22

Suze: But if you go to the Women and Money App, you go to my wall on Friday. I posted information about these three rating services and everything you need to know about their ratings, how they rate everything. So just check it out. But what you need to know. However, for this Suze School

00:03:45

Suze: is the highest rating that you can get from all three of these rating services is a AAA the next highest rating is like a AA plus. Still an incredibly high rating. If that happened to be the rating that your entity that you were lending money to happened to get.

00:04:11

Suze: Now, treasuries are issued in three forms, a treasury bill, a treasury note and a treasury bond.

00:04:23

Suze: The difference between those three are simply in the length of the maturity dates. A bill is usually from a few days up to 52 weeks. A note could be two years, five years, seven years, 10 years, but that's known as a Treasury note. A bond is 20 or 30 years

00:04:51

Suze: and those terms are simply how long you want to lock in a specific interest rate for again, for this Suze School. I'm focusing on bonds, especially the 30 year bond. Although notes work essentially the same way,

00:05:14

Suze: the things I want you to know about bonds when you buy a bond, whatever interest rate is issued

00:05:24

Suze: with that bond. When it comes out, it will never ever change. It is fixed for the life of the bond.

00:05:35

Suze: So if you bought a 30 year bond when it was issued and you kept it for all 30 years, it would pay you that interest rate that never changes for the entire 30 years.

00:05:51

Suze: Next,

00:05:53

Suze: you need to know that when bonds are issued, they are issued at par.

00:06:01

Suze: And when you hear that word power, you just need to know that power means $1000. So when bonds are issued, they're issued at $1000 a bond

00:06:16

Suze: and when the bond matures, it matures at par or $1000 a bond.

00:06:26

Suze: Now, between when it is issued and it matures, it goes up and down in value. Depending on what is happening with interest rates. Why does it go up and down in value? Because not everybody is going to want to hold on to their bond for 30 years.

00:06:51

Suze: So depending on what's happening with interest rate, the value of your bond will go up and down. Now for most of you that never affects you because you usually hold on to your bond for the entire length of the maturity.

00:07:08

Suze: But there are many people when they buy a bond, they sell it before it matures

00:07:16

Suze: or sometimes people buy a bond after it has been issued and they will pay a different price depending on interest rates. And after a bond is issued, it then trades in the secondary market where you can buy or sell a bond.

00:07:40

Suze: But what you have to know is that when interest rates go up in the economy,

00:07:48

Suze: the prices of bonds will go down and when interest rates go down, the prices of bonds go up,

00:07:58

Suze: the longer the maturity of a bond, the more the price of the bond will fluctuate going up or down when interest rates move. Now, many of you experience this with your bond portfolios. Do you remember about a year or so ago when we knew interest rates? Were going to start to go up. And I kept saying to all of you be careful about your long term bond portfolios

00:08:28

Suze: because if interest rates start to go up, they are going to go down dramatically in value.

00:08:35

Suze: And mainly that affected you, not when you had individual bonds, but when you had bond funds or ETFs and many of you watched your bond ETFs o r funds go down 30%.

00:08:49

Suze: So again, the longer the maturity of a bond, the more the price of the bond will fluctuate or go up and down with interest rates. So a 30 year bond will go up and down more in price between the time it is issued and maturity date when interest rates move.

00:09:15

Suze: So a 30 year bond will go up and down more than a 20 year bond. A 20 year bond will go up and down more than a treasury note. A treasury note will go up and down more than a treasury bill.

00:09:31

Suze: So just know that. So again, when you buy a bond, when it first comes out, you will pay $1000 per bond.

00:09:43

Suze: So if you want to invest $10,000 for instance, you will buy 10 bonds. If you want to invest $50,000 you can buy 50 bonds. But remember all bonds are issued at par, which is $1000 and all bonds mature at par, which is $1000. So again,

00:10:10

Suze: after 30 years when that bond matures, you will get back $1000 per bond that you paid. Hopefully. Now that is essentially how bonds work. So let's go to the meat of this lesson.

00:10:29

Suze: Last week, you heard me say that I was starting to buy 30 year treasury bonds and I was buying them little by little that I would be dollar cost averaging into them, especially if interest rates started to go up, which in fact, they did. Now many of you could not understand

00:10:54

Suze: why at my old age of 72 thank you very much. Everybody that I would be buying 30 year bonds.

00:11:06

Suze: And right after I said what I was starting to do Fitch one of the rating services lowered their ratings on us government bonds from A AAA which was their highest rating to A AA plus their next highest ratings.

00:11:27

Suze: Then you sent me emails saying, oh my God, Suze, are you sure this is what you want us to do? They just lowered the rating on the US, I think we should be selling, not buying. Ok. Now,

00:11:40

Suze: did you know that in 2011, August 5th to be exact that standard and poor's one of those three rating services lowered the ratings on the United States debt from AAA, which was their highest rating to a AA plus. Now, why did they do that? Because they were worried at the time

00:12:07

Suze: that the government wasn't going to have the ability to pay their debt for its long term obligations. To this day. 12 years later, the rating from standard and Poor's was never raised back to its highest level, but that hasn't stopped anyone from buying treasuries.

00:12:29

Suze: Moody's rating service still has a AAA their highest on the United States. But the other day when Fitch lowered to a AA plus for essentially the same reason that Standard and Poor's did back in 2011, everyone started to freak and sell their treasury bonds.

00:12:55

Suze: What made absolutely no sense is why Fitch did this at this point in time. It's beyond me. Why didn't they do it in 2007 or 2008? You know, when we were really in trouble, but it is what it is. But when people started to sell their bonds that caused interest rates to rise

00:13:20

Suze: and remember when interest rates rise, the price of bonds go down.

00:13:28

Suze: Now, what I found so interesting is while most were selling probably the greatest investor of all, he was buying, Warren Buffett bought 10 billion, that's a B - billion dollars worth of bonds.

00:13:48

Suze: And then he bought another $10 billion of bonds and was looking to buy another $10 billion of treasury bonds.

00:14:00

Suze: Think about that, right? The greatest investor of all time in my opinion is buying

00:14:10

Suze: and it's true. He was buying short term ones, but he was still buying when everybody else was selling ok. Now, there are three ways to buy a treasury

00:14:25

Suze: again. I'm just gonna repeat this. I mentioned it a little bit ago, but please just stick with me here when a bond is first issued by the government, they have what is called treasury auctions that come out on specific dates if you missed that auction date or you wanna buy a bond after it has been issued

00:14:49

Suze: or maybe you want to sell a bond you own before it matures all of that as I said before is usually done on what is called the secondary market.

00:15:04

Suze: Now on July 17th of this year, when the treasury had its last auction of the 30 year bonds, it went for an interest rate of 3.6 to 5%. Are you writing all this down?

00:15:25

Suze: That means that the 30 year bomb

00:15:29

Suze: that was issued on July 17th

00:15:33

Suze: at 3.625% pays $36.25 per year per every bond over the next 30 years. And that amount will never change because it's fixed. Remember a bond is $1000

00:15:56

Suze: it's issued at par and that bond will pay you $36.25 per year.

00:16:05

Suze: In fact, if you happen to be interested in 30 year bonds at auction, the next one is August 10th. So you can check it out at Treasury direct dot gov. If you're interested, you also can check it out obviously at brokerage firms and things like that. So if you invested $10,000 at that last auction, you would have bought 10 bonds

00:16:34

Suze: and you would be earning $362.50 in interest a year for the next 30 years if you kept the bond that long.

00:16:46

Suze: So as I told you earlier, Fitch on August 1st downgraded the rating of the US, which caused a selling frenzy causing interest rates on treasuries to go up. So those bonds that were issued in July at 3.625%

00:17:08

Suze: started to sell at $920 a bond on the secondary market.

00:17:16

Suze: Remember a bond is issued at par at $1000 if interest rates start to go up in the economy, which they did, the price of that bond goes down. So on the secondary market, that bond was selling for $920 a bond

00:17:37

Suze: which is $80 less per bond than when they were issued. Now again, why did the price of that bond go down? Listen closely to me

00:17:49

Suze: because interest rates in the economy started to go up on that Fitch news to about 4%.

00:17:57

Suze: And who in the world would buy a bond that pays only 3.625%? Remember that is fixed for the life of the bond

00:18:10

Suze: when you could buy a new bond for 4%.

00:18:16

Suze: The answer to that is no one.

00:18:19

Suze: So the price of that bond on the market

00:18:23

Suze: goes down in price to make that fixed interest rate on that bond competitive.

00:18:31

Suze: If you were to divide $36.25 the interest on one bond

00:18:39

Suze: by $920 which was the current price of that bond a little bit ago.

00:18:47

Suze: You'll find that it's about a 4% return on your money. Did that make sense? So when the price of something goes down,

00:18:59

Suze: whatever it is yielding to you, this is true on dividends and everything, the more your yield happens to be, if that's when you buy it.

00:19:10

Suze: So if that makes sense to you, then you understand why I bought that bond

00:19:18

Suze: a little bit ago because now it was yielding me 4%.

00:19:25

Suze: And remember if I did keep that bond for all 30 years when it matures, I would get $1000 a bond

00:19:37

Suze: or par, but I only paid $920 for it. So I would make money there as well.

00:19:47

Suze: So when buying a bond, you have the annual yield, the interest rate that it's paying,

00:19:54

Suze: which is the interest rate that you are getting based on what you paid for that bond. But there's also what is called the yield to maturity, which takes into consideration the price difference of what the bond was purchased at and what you get when it matures. Now, let's just put a pin in all of that for a second because I understand that's a lot to digest, but you have to understand

00:20:23

Suze: how bonds work. Now, obviously, I have no intention of keeping that bond for 30 years. However, the reason that I started buying it little by little these 30 years bonds is that eventually, in my opinion, interest rates have to go back down

00:20:47

Suze: and remember when interest rates go down, the price of bonds go up

00:20:55

Suze: and the longer the maturity, the more they go up, percentage wise. So a 30 year bond will go up more percentage wise than all the other treasuries out there.

00:21:12

Suze: Why do I think that interest rates have to go down at some point?

00:21:19

Suze: Well, because on Monday just a little bit ago, really, on July 31st, the treasury department issued a press release, upsizing its estimated borrowing for the July to September 2023 quarter by $274 billion.

00:21:45

Suze: They raised it to $1 trillion.

00:21:50

Suze: It also pegged the borrowing requirements for the October to December quarter at $852 billion. So all told Uncle Sam is going to have to borrow a serious sum of money to keep thing going. Now, it's no surprise. Therefore, that

00:22:18

Suze: on August 1st, that's why Fitch lowered their rating because they're afraid in my opinion come October, everybody's gonna start fighting again in Congress and they're not going to raise the debt limits and da, da, da da. And here we go all over again,

00:22:39

Suze: but it is very hard to keep the economy stable when the government is paying such high interest rates on this ridiculous amount of money that they are borrowing at these interest rates. You know, it's very different way back when just a few years ago, they were lending you money at half a percent, 1% to the interest rates were so low.

00:23:07

Suze: So they were funding their debt at very low interest rates. Now, they're funding this debt at pretty high interest rates. Now, that doesn't mean that these rates can't go higher,

00:23:22

Suze: but eventually something has to change.

00:23:27

Suze: I'm currently earning 4% on that first bond that I bought that I told you about just a little bit ago. And since then just this week, I bought another one

00:23:43

Suze: and this time, my interest rate is at 4.3% on a 30 year bond.

00:23:51

Suze: Now, why am I doing this? Because if interest rates were to eventually go down, listen to me closely here,

00:24:03

Suze: I'm not doing it simply to get the four or 4.3% interest rate.

00:24:09

Suze: But if, and that's a big if, but if interest rates were to eventually go down to just 3%

00:24:20

Suze: the price of my 30 year bonds could easily go to $1110 a bond.

00:24:31

Suze: So the very first one I bought at $920 a bond

00:24:38

Suze: could easily, if interest rates go to just 3% could easily go up to $1110 a bond or that's approximately a 20% return on my money, which at that time I will probably sell them. And in the meantime, I'm still making 4 to 4.3% while I am waiting.

00:25:08

Suze: That is why I'm doing it now. I would only do this if I could get at least 4% or more on my 30 year treasuries. I would only do this in small stages for it's possible that interest rates could go higher.

00:25:29

Suze: And that's exactly what happened. I bought a chunk of bonds, the 30 year bonds at 4%. Then I bought another equal chunk at 4.3%. We'll just happen to see if they go higher or not. Now, if I am totally wrong, then my beneficiaries will own a 30 year bond.

00:25:53

Suze: So I would not do this with money that you may need in just a few years.

00:26:00

Suze: Now, obviously, again, there is no way for me to know what your personal financial situation is. So you have to decide what you want to do and if it's good for you, one other thing I want you to know through Treasury direct dot gov, you can buy bonds for as little as $100

00:26:26

Suze: even though they're priced at par. So you would own 1/10 of a mom. So you can do this strategy if you don't have a whole lot of money. If you buy it through a brokerage firm

00:26:42

Suze: or the secondary market, the minimum is $1000. So it's just, that's how it works for me personally. I have been buying them through my broker because when you buy it through Treasury direct dot gov or when you buy it at auction,

00:27:06

Suze: you don't know exactly what the interest rate is going to be on that bond when it is issued at auction,

00:27:15

Suze: when I buy it through my broker, I know exactly the price that I'm paying for that bond. And therefore I know exactly the interest rate that I'm getting. So it's just very easy for me to buy, to sell whatever it is that I want to do.

00:27:35

Suze: Now, many of you have asked me if you can do this with exchange traded funds or bond funds. And for me personally, I would stick to individual bonds. And here is why back in 1981

00:27:55

Suze: the 30 year treasuries were at about 15% which is what I bought for my clients individual 30 year bonds and we locked in 14.5 to 15% for 30 years. Now, many of the other brokers at that time

00:28:21

Suze: were buying treasury mutual funds. ETF S hadn't been invented yet. So mutual funds at that time were loaded mutual funds. They didn't have no load, mutual funds for. There was a hefty commission for brokers to buy mutual funds that sold treasuries.

00:28:47

Suze: If I bought 100,000 or 50,000 or even a million dollars of a 30 year treasury bond for my client, my total commission was $25.

00:29:03

Suze: The other brokers that chose to do loaded mutual funds,

00:29:09

Suze: they made 5% or more

00:29:14

Suze: on whatever money was invested. So think about it, if they put $500,000 of their clients money into these loaded treasury mutual funds, they made $25,000 versus my $25. Big difference. Everybody.

00:29:35

Suze: Now at the time of purchase, both the individual treasuries and the funds were paying about 14.5 to 15%.

00:29:48

Suze: But as interest rates started to go down

00:29:53

Suze: the 14.5 to 15% on the 30 year treasuries that I bought for my clients stayed at 14.5 or 15%. Remember that interest rate is fixed for the life of the bond and it's the price of the bond that goes up and down.

00:30:15

Suze: So on the mutual funds. However,

00:30:19

Suze: the interest rate which is not fixed. So on an ETF and a mutual fund today, the interest rate is not fixed.

00:30:27

Suze: So when interest rates started to go down, the interest rate on the mutual fund that everybody had purchased was going down as well.

00:30:41

Suze: But the price of the fund also really wasn't appreciating

00:30:48

Suze: on the bonds that I had bought for my clients. When interest rates started to go down,

00:30:55

Suze: the price of the bond started to go up and up. There was a time when it went from 15, 14.5 down to 7% the price of that bond essentially doubled

00:31:11

Suze: when I would look at the mutual funds that everybody had purchased,

00:31:17

Suze: the price didn't go up like that of the mutual fund, but the interest rate had also continued to go down and down. It wasn't at 14.5 or 15% anymore. Why?

00:31:33

Suze: Because in an ETF or a mutual fund, people continue to invest in the ETF and mutual fund as time goes on and the manager has to invest that money and buy bonds for whatever the interest rate is at that time.

00:31:54

Suze: So it all gets diluted.

00:31:59

Suze: That is why to this day, I don't buy bond ETFs or bond mutual funds. I only buy individual bonds. So lesson learned.

00:32:15

Suze: All right. Now, we know why I've been buying 30 year treasury bonds. I most likely will continue to do so depending on interest rates. But you want to make sure that you only do this really if interest rates are at 4% or higher.

00:32:39

Suze: And it makes sense for you in your particular situation. Now, I hope that this Suze School was kind of a bonding experience between all of us. That was kind of stupid, wasn't it?

00:32:54

Suze: But it's ok I said it, it's on the podcast what to do. But until Thursday, when Miss Travis joins us for Ask KT and Suze Anything, there's really only one thing that I want you to say every single day. And it is this today, wherever I go, I will create a more peaceful, joyful, and loving world. And if you do that,

00:33:19

Suze: I promise you, you will be unstoppable.

00:33:30

Music: Music (out).


Take advantage of the Ultimate Certificates with Alliant Credit Union at: bit.ly/3kwMcjR

Get Suze’s special offers for podcast listeners at suzeorman.com/offer

Join Suze’s Women & Money Community for FREE and ASK SUZE your questions which may just end up on her podcast!

To ask Suze a question, download by following one of these links:

CLICK HERE FOR APPLE: https://apple.co/2KcAHbH

CLICK HERE FOR GOOGLE PLAY: https://bit.ly/3curfMI

Suze Orman Blog and Podcast Episodes

Suze Recommends


Suze Orman Blog and Podcast Episodes

Saving


Locking In a Guaranteed High Return

Read Now

Suze Orman Blog and Podcast Episodes

Home Ownership


Podcast Episode - Ask KT & Suze Anything: How Do I Choose a Financial Planner?

Read Now

Suze Orman Blog and Podcast Episodes

Saving


Your Ultimate Savings Opportunity Starts Now

Read Now