Q&A: U.S. Treasury bills

Question: Are U.S. Treasury bills a good investment for the private investor since countries like China think so? I was watching a show and the expert surmised that buying a long-term Treasury bill paying 2% would give a 9% return if interest rates fell to 1%. Can you explain how that works? – Dale M.

Gordon Pape answers: Treasury bonds (as long-term securities are properly called) may be okay for the Chinese but I would not recommend them for Canadians for a couple of reasons.

First, there is a risk of currency loss. It’s a good bet that the Bank of Canada will start to raise interest rates in this country before the U.S. Federal Reserve Board does (it’s on hold until the end of 2014). That would put upward pressure on the loonie and reduce the value of any U.S. dollar assets accordingly.

Second, the chances of long-term T-bond rates dropping to 1% appear very slim. It would take a major recession for that to happen. A more likely scenario is that rates will gradually rise, which would reduce the market price of the bonds and you’d suffer a capital loss.

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