An alternative to US Treasuries

"Where should I put my money right now? I don't feel comfortable investing in stocks, and I've heard that Treasury bonds are paying next to nothing. Is there any place else that is safe to invest?"

Because of the market turmoil last year, Treasuries became the safe haven for many investors. In fact the government's guarantee implicit in Treasuries sounded so good that investors were willing to accept lower and lower rates of return for that safety. For a brief period they were even willing to accept a negative return, and give up a small portion of their principal for the reassurance of knowing that the rest of their principal would be safely returned to them. The problem is that sooner or later the stock market is going to recover and investors are going to turn to stocks for a better return. When this happens the demand for Treasuries will go down, and hence the interest rate needed to entice individuals to buy Treasuries will have to go up. This in turn will bring down the value of those Treasuries bought at ultra-low interest rates. You would not lose money if you held your Treasury to its maturity date but if you decide to sell it before that date you could lose some of your principal.

A better choice at this time might be municipal bonds. Current yields on Treasuries don't exceed 1 percent until you go out 3 years or more, but the national average for 2 year municipal bonds is 2.10 percent. If you are in the 25 percent tax bracket that is the same as earning 2.8 percent on a taxable bond (if you buy a municipal bond of your home state you can save on state tax too, increasing the after-tax yield.) Municipals carry more risk than Treasuries since you're investing in an obligation of a particular state. However the risk of default is low and municipals are considered just above Treasuries in terms of safety. To protect yourself stick with general obligation bonds which are backed by the full faith and credit of the state.

Whatever type of bond you choose you should probably stay with shorter maturities of 1-5 years, so you won't be locked into these very low rates for too long. In a few years rates should be higher and you'll be able to reinvest your proceeds for a better return. You can learn more about municipal bonds, and bonds in general, at www.investinginbonds.com.