A 10-year US Treasury yielded 0.62% in August 2020. Five years later it is closer to 4.2%. If you bought the bond in 2020 you locked in a yield that, after inflation, lost purchasing power every year. If you buy the bond today, you lock in a yield that — at current and forecast inflation — actually keeps up.
This is the most positive thing I have written about Treasuries in seven years.
What a Treasury actually is
A US Treasury bond is a loan you make to the federal government. You pay $1,000 today, the Treasury pays you coupon interest twice a year for the term of the bond (typically 2, 5, 10, or 30 years), and at maturity you get your $1,000 back. The yield you see quoted is the annual interest rate.
Treasuries are considered the safest yield-bearing instrument in the world, on the assumption that the US government will pay back its debt. They are not, however, risk-free. If interest rates rise after you buy, the market price of your bond falls — because newer bonds offer more attractive yields, and yours has to discount to compete. If you hold to maturity, you get your principal back regardless. If you sell early, you can lose money.
Real yield: the only number that matters
The headline yield is nominal. The number that should drive your decision is the real yield — nominal yield minus expected inflation.
If a 10-year Treasury pays 4.2% and the market is pricing in 2.3% inflation (you can see this directly via the 10-year breakeven inflation rate), the real yield is approximately 1.9%. That is positive. It is also small — small enough that the bond is not making you rich, but large enough that the bond is no longer making you poor.
For most of 2010–2021, real yields on 10-year Treasuries were near zero or negative. Holding bonds during that period was, in real terms, paying the government to store your money. The 1.9% we have now is a different environment, and the right portfolio response is different.
A bond at zero real yield is not an investment. It is a parking space. A bond at +1.9% real yield is a small but genuine return.
Bond ladders, plain English
The straightforward way to hold Treasuries directly is a ladder. You buy bonds maturing on a staggered schedule — say, one bond maturing each year for the next five — and as each one matures, you reinvest the principal into a new five-year bond at the end of the ladder. The structure smooths out interest-rate moves: you never have to sell early, you never have to guess when rates peak, and your portfolio's average yield adjusts gradually.
For most readers, the easier version is a short-term Treasury ETF — SHY (1–3 year), VGSH (1–3 year), or SCHO (1–3 year). The expense ratios are around 0.04%, the duration is short enough that interest-rate risk is small, and you get the diversification of dozens of holdings without running the ladder yourself.
For yield-maximizers willing to take more interest-rate risk, longer-duration ETFs (IEF for 7–10 year, TLT for 20+ year) pay more but bounce around more.
TIPS and I-bonds for inflation
Two Treasury products are designed specifically for inflation:
TIPS (Treasury Inflation-Protected Securities) pay a real rate of interest, with the principal value adjusting up or down based on CPI. If you buy a 10-year TIPS with a real yield of 1.7% and inflation runs at 3%, your nominal return is approximately 4.7%. If inflation runs at 5%, your nominal return is 6.7%. The protection is real and mechanical.
I-bonds (Series I Savings Bonds) are a retail-only product, capped at $10,000 per person per year. The rate has two components — a fixed real rate and a variable inflation rate — adjusted every six months. They cannot be sold before one year, and selling between years 1 and 5 forfeits three months of interest. Useful as an inflation-protected savings vehicle, less useful as a portfolio building block.
What I actually hold
My fixed-income allocation is roughly 18% of total portfolio. Inside that:
- Half in a short-term Treasury ETF (1–3 year). Stable, liquid, current yield around 4.4%.
- A quarter in an intermediate Treasury ETF (5–10 year). More interest-rate sensitivity, slightly higher yield.
- The remaining quarter in TIPS, via a TIPS ETF (SCHP). Insurance against an inflation regime that surprises to the upside.
I have not bought I-bonds for two years. The fixed-rate component was high enough in 2022 (0.4%) and 2023 (0.9%) to make them attractive; at the current 1.3% fixed rate they are even better, and I plan to top up to the annual limit this calendar year.
One last note. Bonds inside a taxable account are tax-inefficient — the interest is taxed at ordinary income rates, which can be 24%, 32%, or more, depending on your bracket. State tax does not apply to Treasury interest, which softens this slightly. But if you have the room, hold bonds inside a 401(k), IRA, or HSA. The wrapper matters more than the yield does, at the margin.
