Retirement can be the ultimate vacation … IF you plan ahead

As we get further into summer, we’ve had several friends tell us about their vacation plans. Listening to them, it’s clear they’ve put a lot of thought and effort into planning for their trip.

That got us thinking: what if people put as much time into planning their retirement as they do for their vacations?

Unfortunately, this isn’t usually the case. That’s a problem because the average vacation only lasts a few weeks. Retirement, on the other hand, can span decades.

We think one reason for this is because many people don’t know how to start planning for retirement … or they’re a bit intimidated by the thought of it. But planning isn’t what should intimidate anyone. Retiring without a plan is what’s really scary.

We spend a lot of time and effort on our clients’ retirement plans. But it occurred to us that there may be folks out there who can’t say the same thing.

Fortunately, it’s easy to get started—and some aspects of retirement planning are actually fun! When you get right down to it, all you really must do is apply the principles of good vacation planning to your retirement. We’ll give an example. Before writing this, we looked at several different travel websites. Most of them gave tips on how to go on vacation. We were amazed at how similar these tips were to planning for retirement. So, we’ve listed some of them below, along with how to make them suitable for a person’s golden years:

Vacation Planning	Retirement Planning
Tip #1 – Make a list of places you want to visit. Write down the activities you want to do in each location, and what you like about them.	Tip #1 – Make a list of goals you want to pursue during retirement. Write down why they’re important to you.
Tip #2 – Rank these places in order of how important each one is to you.	Tip #2 – Rank these goals in order of how important each one is to you. Have fun with these first two steps.
Tip #3 – Determine your budget. Factor in travel, hotel, and food costs. Then determine how much it will cost to do the various activities you listed in Tip #1. Don’t forget to include how much you plan to spend on souvenirs and things like that.	Tip #3 – Determine your budget. First start with expenses; where do you want to live, and how much will it cost to live there? What are your utilities like? What medical costs do you anticipate having? What debts do you owe? Finally, estimate how much it will cost to pursue the goals you listed in Tip #1. (It’s okay if it’s a rough estimate.)
Tip #4 – After determining what your vacation will cost, calculate your current budget by adding up your income minus expenses. Whatever’s left is what you have, to put towards your retirement on a monthly basis. vacation.	Tip #4 – Calculate your current budget by adding up your income minus expenses. Whatever’s left is what you have, to put towards your retirement on a monthly basis.
Tip #5 – Go online, consult with a travel agent, or check out a travel book and try to find ways to bring your costs down. Savvy vacationers can find deals, coupons, and tour companies that really make a trip easier on your wallet.	Tip #5 – Get together with me and bring everything you’ve written down so far. We can discuss possible ways to further fund your retirement, whether it’s through investing or something else.
Tip #6 – Book your vacation!	Tip #6 – Set your retirement date!

Markets have been hitting some very positive milestones lately, but it’s not clear that we’re in a bull market yet.¹

Is the bear market actually over?

Are the bulls back or are we seeing another “bear market rally” that will eventually lose steam?

Let’s discuss.

When stocks are caught between surges and pullbacks, and we’re not entirely sure what’s going on, it’s useful to go back to the fundamentals.

What bullish factors support the rally?

1. Despite all the worrying, it doesn’t look like a recession is here yet.²

The labor market is still extremely strong and the housing sector is showing signs of optimism again.

More positive signs of a strong economy will support a rally.

2. Inflation seems to be under control and the Fed has (finally) paused interest rate hikes to see how the economy responds.³

Investors are more likely to stay optimistic if the Fed holds to its plan to limit future rate increases.

3. FOMO. Some of the greedy sentiment behind this rally is due to a legitimate fear of missing out on the next bull market. No one wants to be on the sidelines when markets move.

What bearish factors could kill the rally?

1. The current surge has been largely driven by technology stocks and hasn’t broadened across all sectors.⁴

That means any negative sentiment about these tech high-flyers is likely to have a disproportionate effect on the overall rally.

2. We still can’t be certain that a recession won’t hit this year and the economy is still facing headwinds that are likely to impact corporate earnings.²

3. Growth may be hard to come by for U.S. businesses.⁵ Since stock prices reflect the value of their underlying companies, earnings misses or negative surprises could tank sentiment.

Bottom line: For the rally to keep going, investors will not only have to stay positive about technology stocks but also gain confidence in the overall state of the economy.

Here’s some good news: Whether or not the bear market is actually, finally over, the overall picture is looking brighter.

We’re watching closely.

Sources

1. https://www.cnbc.com/2023/06/19/stock-market-today-live-updates.html
2. https://www.fidelity.com/insights/markets-economy/recession-with-us
3. https://www.cnbc.com/2023/06/14/fed-rate-decision-june-2023.html
4. https://www.fidelity.com/insights/markets-economy/tech-stocks-performance
5. https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_060923.pdf

A new deal finally put the debt ceiling issue to rest (for now, anyway), and stocks are rallying.

Are we on the brink of a new bull market?

We might be. The S&P 500 has soared in 2023 and is up nearly 20% from its October 2022 low.¹

That’s pretty surprising given the concerns about interest rates, recessions, banks, and a war in Europe, so some analysts are wary.

How do we know when we’re in a bull market?

First, let’s acknowledge that the terms “bull” and “bear” are just shorthand for general market trends and don’t necessarily mean anything scientific.

Generally, a 20% decline from a market high defines a bear market.

(You might remember all the headlines from 2022 when the current one started.)

However, bull markets are a little harder to call.

A 20% increase from a bear market low doesn’t necessarily kick off a bull market.²

Since a 20% increase still leaves you shy of your original market high, many analysts don’t consider it a proper bull market yet.

They want to see stocks achieve a new historic high before officially calling an end to the bear market.³

We’re not there yet.

But, it’s probably fair to say that we’re flirting with a bull market.

What’s driving the recent rally?

Here’s where analysts have some concerns.

The recent rally centers around a few big tech stocks and seems to be energized by enthusiasm for artificial intelligence.

That means the rally lacks breadth. Your average S&P 500 company has only seen gains of less than 3% this year.³

The fact that the rally relies on the performance of a few high-flying stocks could spell volatility ahead.

What should I expect in the weeks ahead?

Hard to say. Markets seem to have momentum and we could see the rally continue.

However, recession and interest rate concerns are still bubbling under the surface, so let’s not break out the party favors yet.⁴

Let’s celebrate just how far we’ve come since the bear market began last year, but stay flexible enough to accept any pullbacks and volatility that might lie ahead.

Sources:
¹ Yahoo Finance. S&P 500 closing price performance between October 12, 2022 and June 5, 2023.
² https://www.axios.com/2023/06/06/us-stock-market-bullish-vs-bearish
³ https://www.nytimes.com/2023/06/05/business/stocks-bull-market.html
⁴ https://finance.yahoo.com/news/recession-talk-rages-on-despite-robust-jobs-market-191308453.html

Every Memorial Day, we as Americans take time to remember the soldiers who died serving our country.  We lay flowers at their graves. We touch the monuments erected in their memory. Sometimes, we even walk on the same battlefields where they fought and fell. Knowing all the while that we wouldn’t be here without them. 

In our opinion, this is an American tradition as patriotic as singing the national anthem or reciting the Pledge of Allegiance. And it makes Memorial Day as important as Independence Day or Thanksgiving. Saluting our fallen, honoring their sacrifice, and vowing to build on the ground they broke is the least we can do. Furthermore, we believe it inspires us all to be greater citizens ourselves.

Recently, we came across a speech given by President Woodrow Wilson on May 30, 1914, at the National Cemetery in Arlington. At the time, Memorial Day already had a long history, but it was not yet as standardized as it is today. But with the last veterans of the Civil War passing away, and new storm clouds gathering over Europe – World War I would break out a few months later – more and more Americans were realizing the importance of giving thanks to those who gave their lives. 

Wilson’s speech – which he apparently gave without any preparation – perfectly describes why this is such a vital tradition. In honor of the holiday, we thought we would share some excerpts from it with you. We hope the words touch your heart as much as they have ours. 

We are so grateful for this nation. We are so humbled by the knowledge others died so that our country might live. Now, it is our job to ensure their memories forever live on, too.

On behalf of everyone here at Minich MacGregor Wealth Management, we wish you a safe and peaceful Memorial Day.

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Memorial Day Address
Given by Woodrow Wilson, 28^th President of the United States, on May 30, 1914

Ladies and Gentlemen, I have not come here today with a prepared address. But I will not deny myself the privilege of joining with you in an expression of gratitude and admiration for the men who perished for the sake of the Union. They do not need our praise. They do not need that our admiration should sustain them. There is no immortality that is safer than theirs. We come not for their sakes but for our own, in order that we may drink at the same springs of inspiration from which they themselves drank.

Whenever a man who is still trying to devote himself to the service of the Nation comes into a presence like this, or into a place like this, his spirit must be peculiarly moved. A mandate is laid upon him which seems to speak from the very graves themselves. Those who serve this Nation, whether in peace or in war, should serve it without thought of themselves. I can never speak in praise of war, ladies and gentlemen; you would not desire me to do so. But there is this peculiar distinction belonging to the soldier, that he goes into an enterprise out of which he himself cannot get anything at all. He is giving everything that he hath, even his life, in order that others may live, not in order that he himself may obtain gain and prosperity. And just so soon as the tasks of peace are performed in the same spirit of self-sacrifice and devotion, peace societies will not be necessary. The very organization and spirit of society will be a guaranty of peace.  Therefore, this peculiar thing comes about; that we can stand here and praise the memory of these soldiers in the interest of peace. They set us the example of self-sacrifice, which if followed in peace will make it unnecessary that men should follow war anymore.

We are reputed to be somewhat careless in the use of the English language, and yet it is interesting to note that there are some words about which we are very careful. We bestow the adjective “great” somewhat indiscriminately. A man who has made conquest of his fellow-men for his own gain may display such genius in war, such uncommon qualities of organization and leadership that we may call him “great,” but there is a word which we reserve for men of another kind and about which we are very careful. That is the word “noble.” We never call a man “noble” who serves only himself; and if you will look about through all the nations of the world upon the statues that men have erected, you will find that almost without exception they have erected the statue to those who had a splendid surplus of energy and devotion to spend upon their fellow-men. Nobility exists in America without patent. We have no House of Lords, but we have a house of fame to which we elevate those who, forgetful of themselves, study and serve the public interest, who have the courage to face any number and any kind of adversary, to speak what in their hearts they believe to be the truth.

We admire physical courage, but we admire above all things else moral courage. I believe that soldiers will bear me out in saying that both come in time of battle. I take it that the moral courage comes in going into the battle, and the physical courage in staying in. There are battles which are just as hard to go into and just as hard to stay in as the battles of arms, and if the man will but stay and think never of himself there will come a time of grateful recollection when men will speak of him not only with admiration but with that which goes deeper – with affection and with reverence.

So that this flag calls upon us daily for service, and the more quiet and self-denying the service, the greater the glory of the flag. We are dedicated to freedom, and that freedom means the freedom of the human spirit. All free spirits ought to congregate on an occasion like this to do homage to the greatness of America as illustrated by the greatness of her sons.

It has been a privilege, ladies and gentlemen, to come and say these simple words, which I am sure are merely putting your thought into language. I thank you for the opportunity to lay this little wreath of mine upon these consecrated graves.

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You can find the full version of this speech here: www.presidency.ucsb.edu/documents/memorial-day-address

Markets are doing their thing again, so let’s discuss.

Markets tumbled, heading into negative territory, and then bounced back. And then promptly fell again.¹

We’re caught in a whipsaw pattern of uncertainty.

Is this weird?

Not really. These things happen pretty regularly when investors get jittery.

Let’s talk about what’s going on.

(Scroll to the end if you just want our takeaways.)

What led to the selloff?

Phew. There’s a lot going on.²

There’s yet another debt ceiling deadlock between Congress and the White House.

Worries about the banking sector continue.

Sticky inflation is still on everyone’s radar.

And then there’s the endless speculation about recessions and what the Federal Reserve might do next.

All these stressors lead to jumpy investors and nervous markets.

Could we see another serious correction?

Absolutely. If the debt ceiling standoff drags on or more bad headlines appear, markets could react negatively.

And, corrections and pullbacks happen very frequently because there’s always something going on.

How often? Let’s go to the data.

Here’s a chart that shows just how often markets dip each year. (You may have seen this chart before because it’s an oldie and goodie.)

Take a look at the red circles to see the market drops each year.

The big takeaway? In 15 of the last 23 years, markets have dropped at least 10% each year.³

Market pullbacks happen all the time.

We’re dealing with a lot of uncertainty and investors are feeling cautious.

However, that doesn’t mean that we should panic and rush for the exits.

Markets are going to be turbulent this year and knee-jerk reactions can be costly.

We don’t have a crystal ball, so we don’t know how it’s all going to play out, but this situation isn’t surprising.

We expected volatility and we’re prepared.

We’re watching markets closely. Any questions or concerns we can address? Let us know. We’re here to help.

Sources

1. https://www.cnn.com/2023/05/07/business/stocks-week-ahead/index.html
2. https://www.cnbc.com/2023/05/08/stock-market-today-live-updates.html
3. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

On May 1, the Secretary of the Treasury informed Congress that the U.S. could default on its debt by June 1 if legislators do not raise the nation’s debt ceiling.¹

This announcement was not a surprise.  The U.S. officially hit the debt ceiling in January but were able to stave off any immediate effects using “extraordinary measures.”  (These are essentially accounting tools the government can use to pay its bills without authorizing any new debt.)  The Secretary’s recent message was to let Congress know those measures are close to being exhausted.  Without raising the debt ceiling, the U.S. will not have the money it needs to pay its debts.  And while the exact date this will happen is unknown, it could come by June 1 at the earliest.

Should a default happen, the economic consequences could be severe.  But even if Congress staves off the unthinkable, simply going down to the wire can have negative effects on the markets.  To explain why that is, it’s useful to first remind ourselves what the debt ceiling is.

The debt ceiling is “the total amount of money that the government is authorized to borrow to meet its existing legal obligations.”²  What are these obligations?  It’s a massive list.  Think Social Security and Medicare benefits, for starters.  Tax refunds, military salaries, and interest payments on Treasury bonds are hugely important, too.  The debt ceiling, then, is the limit to what the government can borrow to pay back what it has already spent.  (Or is legally obligated to spend.)

Normally, raising the debt ceiling requires a simple act of Congress.  But in some years, politicians disagree about whether the ceiling should be raised without an accompanying decrease in spending.  That’s the scenario we’re in right now.  Congressional Republicans do not want to raise the debt ceiling without enacting spending cuts at the same time.  Democrats, meanwhile, prefer a “clean” hike where the ceiling is raised without conditions.  In their view, any changes to federal spending should come separately, after the nation’s existing debts are addressed. 

In other words, the two sides of the political aisle are engaged in a game of fiscal “chicken.”  Each betting the other will blink first. 

The problem with this game is that at some point, if a resolution isn’t reached, everyone loses.  While no one is quite sure what will happen if the U.S. defaults – it’s never happened before – it’s not hard to guess, either.  Look at that list of obligations we mentioned earlier.  Now, imagine if they all just…stopped.  No Social Security checks.  No Medicare payments.  No tax refunds.  Tens of thousands of soldiers and government employees without income.  And don’t discount the importance of interest payments on Treasury bonds.  Without this, interest rates would skyrocket and probably lead to a major recession. 

Now, it’s important to note that this is not our country’s first rodeo with the debt ceiling.  This has actually happened several times over the past twelve years.  In each instance, Democrats and Republicans eventually came to an agreement and raised the ceiling.  Most experts expect the same thing to happen this time.

That said, the two sides are still very far apart.  While House Republicans have made a proposal on the cuts they want to see, most are measures that Democrats are unlikely to agree to.  (The bill would lift the debt ceiling by $1.5 trillion through March of 2024 while eliminating $130 billion in government funds.  But that’s not a very long time, and most of the cuts are to areas that the White House considers high priority.³) The two sides have agreed to a meeting on May 9, but it’s doubtful whether that will lead to anything. 

The closer we get to June; however, the more nervous Wall Street will get.  Given how much uncertainty already exists in the markets – thanks to rising interest rates and a recent spate of bank failures – a debt ceiling crisis is the last thing investors need.  To be sure, there are other possible outcomes to this situation.  Perhaps the most likely is that Congress enacts a short-term increase to the borrowing limit.  This would give themselves more time to pass something longer lasting.  It would also be seen as kicking the can further down the road…and not much further at that! 

If the U.S. does default, there may be ways to blunt the impact.  For instance, the government could prioritize its debt payments so that not everyone gets left out in the cold all at once.  Another possibility would be for the Federal Reserve to buy up more Treasury bonds.  This would at least stabilize the bond market.  But none of these options are ideal, and it would be best for everyone to avoid them.

So, that’s where things stand.  In the coming weeks, we’ll post more detailed information on what hitting the debt ceiling could mean for investors.  (Assuming Congress doesn’t get its act together before then.)  In the meantime, our team will continue to monitor the situation carefully.            

As always, please let us know if you have any questions, or if there is anything we can do for you!

¹ “Treasury’s Yellen says US could default as soon as June 1,” The Associated Press, May 1, 2023.  https://apnews.com/article/x-date-debt-ceiling-yellen-treasury-borrowing-f726fd88a9bb7f72e50f0b948731ac57

² “Debt Limit,” U.S. Department of the Treasury, https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit

³ “No Solution in the Senate,” Politico, May 1, 2023.  https://www.politico.com/news/2023/05/02/senate-parties-debt-00094873

The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investing-related question that many people have but are afraid to ask. Last time, we answered the question, “What’s the difference between the various types of bonds?” Now, we’d like to continue in that vein by answering:

Questions You Were Afraid to Ask #8:
What on earth do all these bond terms mean?

One common frustration investors have is dealing with all the terms and jargon used in the financial industry. Ever hear two Wall Street types talking? It can be like listening to a bad episode of Star Trek!

Bonds come with a lot of lingos which can be very intimidating for investors. So, in this message, let’s break down a few common terms you’re likely to hear in the media or when thinking about investing in bonds.

As we covered in our last message, when you buy a bond, you are lending money to an issuer. In return, the issuer promises to pay you a specified rate of interest on a regular basis, and then return the principal when the bond matures. In this paragraph alone, we can find four common terms: issuer, par value, coupon rate, and maturity.

Issuer: This is the entity that “issued” the bond to borrow money. Generally, issuers include local and state governments, the U.S. Treasury, and corporations. Whoever it is, it’s their responsibility to make interest payments and repay the amount you initially loaned. This brings us to:

Par Value: This is the amount that must be returned to the investor when the bond matures – essentially, the investor’s principal. (Many bonds are issued at a par value of $1,000.) Note that it doesn’t matter whether the bond matures in 10, 20, or 30 years. Whenever that time is up, the issuer would still pay back the initial par value. You may also occasionally see the term “face value” instead of par.

Coupon Rate: This is the bond’s interest rate, paid by the issuer at specific intervals. For instance, let’s say you owned a $1,000 bond with a 5% coupon rate. The issuer would then pay you $50 in interest each year until maturity. (Note that some bonds pay interest semiannually. In such cases, you would be paid $25 every six months, which of course equals the same $50 in interest per year.)

You may be wondering how coupon rates are determined. There are two main factors: the amount of time to maturity, and the credit rating of the issuer. Typically, bonds that take longer to mature come with higher rates. After all, investors want compensation for not getting their principal back until later. Conversely, bonds with shorter maturities usually pay lower interest rates. Furthermore, if the issuer has a low credit rating – meaning there is some risk that they may not be able to repay their creditors – they will usually pay higher interest rates to compensate for the additional risk.

So, why is it called a “coupon” rate? Once upon a time, investors were given actual, physical coupons to redeem to collect their interest payments.

Maturity: This term is simple.  You’ve probably figured it out already. This is the amount of time until the bond is due to be repaid. A 10-year Treasury bond, for instance, matures 10 years from the date it was issued.

Rating: As mentioned, some issuers have higher or lower credit ratings. An issuer rating signifies the bond’s credit quality. Here in the United States, there are three main rating services: Standard & Poor’s, Moody’s Investor Services, and Fitch Ratings Inc. Each agency rates bonds based on the issuer’s potential ability to pay both interest and principal in a timely fashion.

Price: Hopefully, all these terms have been easy to understand, because here is where things get a little tricky. As you know, bonds can be traded on the open market. For example, let’s say Fred buys a bond, but before it matures, decides to sell it to Fran. The “price” is the amount for which the bond is traded. Sometimes, bonds trade at their par value, but they don’t have to be. For instance, imagine Fred bought his bond for $1000, but trades it to Fran for only $950. The bond’s price, then, is $950, and is said to be traded at a discount. On the other hand, if Fred trades it for $1,050, then Fran would be buying it at a premium.

Why would a bond’s price differ from its par value? Sometimes, due to rising or falling interest rates. For example, if interest rates around the country rise above what they were when the bond was issued, that bond would no longer be as valuable. That’s because the old bond’s coupon rate would be lower than what an investor could get if they bought a new bond. Hence, if Fred wanted to sell his bond before maturity, he would have to do so at a discount.

There is one final bond-related term you should know – yield. In fact, this is probably the one you’re most likely to hear about in the media. Unfortunately, it’s also a little too complex to define in a paragraph or two, so it’ll be the sole subject of next month’s letter.

In the meantime, we hope this message helped demystify some of the lingo around bonds. As you can see, most of these terms aren’t really that complex once you translate them into plain English. Have a great day!

Some time ago, we wrote a series of posts called “Questions You Were Afraid to Ask.”  Each one answered a common question many investors have but feel uncomfortable asking. 

When we were young, we were taught that “The only bad question is the one left unasked.”  As financial advisors, we’ve found that statement to be true!  Every day, our clients ask us questions about the markets, taxes, their personal finances, you name it.  Over the course of our careers, we have never thought, “That’s a stupid question.”  Not once. That’s because stupid questions simply don’t exist! 

Lately, several friends and acquaintances who were also receiving our articles asked us to start the series up again.  Since we love helping people in our communities learn more about how finance works, we’re happy to do it.  So, without further ado, let’s answer:

Questions You Were Afraid to Ask #7:
What’s the difference between all these types of bonds?

When you buy a bond, you are lending money to the issuer – generally a company or government.  In return, the issuer promises to pay you a specified rate of interest on a regular basis, and then repay the principal when the bond matures after a set period of time. 

As you know, the markets had a very up-and-down year in 2022.  Whenever that happens, many investors start showing renewed interest in bonds, because they tend to be less volatile than stocks.  This interest may continue in 2023. But there are several types of bonds to choose from, each with different characteristics.  All those options can be confusing, so we figured now would be a good time to give people a brief overview of the main types that investors have to choose from.  Let’s start with:

Corporate Bonds

Corporate bonds are issued by both public and private corporations. Companies use the proceeds of these bonds to buy new equipment, invest in new research, and expand into new markets, among other reasons. These bonds are usually evaluated by credit rating agencies based on the risk of the company defaulting on its debt. 

Corporate bonds can be broken down into two sub-categories: Investment-grade and High-Yield.  Investment-grade bonds come with a higher credit rating, implying less risk for the lender.  They’re also considered more likely to make interest payments on time than non-investment grade bonds. 

High-yield bonds have a lower credit rating, implying higher risk for the investor.  These are typically issued by companies that already have more debt to repay than the average business or are contending with financial issues.  Newer companies may also issue high-yield bonds, because they simply don’t have the track record yet to garner a high credit rating. 

In return for this added risk, high-yield bonds typically pay higher interest rates than investment-grade bonds.  In short, investment-grade implies lower risk for a lower return; high-yield implies higher risk for a higher return. 

Muni-Bonds

Municipal bonds, or “munis”, are issued by states, cities, counties, and other government entities so that entity can raise funds.  Sometimes these funds are to pay for daily operations like maintaining roads, sewers, and other public services.  Sometimes the funds are to finance a new project, like the building of a new school or highway. 

Muni-bonds can also be broken down into two sub-categories: Revenue bonds and general-obligation bonds.  The former are backed by the revenues from a specific project, such as highway tolls.  The latter are not secured by any asset but are instead backed by the “full faith and credit” of the issuer, which has the power to tax residents in order to pay bondholders, should that ever be necessary. 

In other respects, muni-bonds work similarly to corporate bonds in that the holder receives regular interest payments and the return of their original investment.  But they do come with one additional advantage, in that the interest on muni-bonds is exempt from federal income tax.  (It may also be exempt from state and/or local taxes if the holder resides in the community where the bond is issued.)  However, muni-bonds often pay lower interest rates than corporate bonds do. 

U.S. Treasuries

Treasury bonds are the type of bonds you usually hear about in the news.  As the name suggests, these are issued by the U.S. Department of Treasury on behalf of the federal government.  They carry the full faith and credit of the government, which has historically made them a very stable and popular investment.  In fact, U.S. treasuries tend to be so stable that economists often use them as a bellwether for the overall health of the entire economy. 

There are several types of U.S. Treasury bonds.  Treasury Bills are short-term bonds that mature in a few days to 52 weeks.  Treasury Notes are longer-term securities that mature in terms of 2, 3, 5, 7, or 10 years.  Finally, actual U.S. Treasury Bonds typically mature every 20 or 30 years.  Both Notes and Bonds pay interest every six months. 

Finally, we have Treasury-Inflation-Protected Securities, or TIPS.  These are notes and bonds whose principal is adjusted based on changes in the Consumer Price Index, which tracks inflation. Interest payments are made every six months and are calculated based on the inflation-adjusted principal. That means if inflation goes up, so too does the principal in the bond…thereby increasing the amount of interest that is paid. However, if inflation goes down, the principal does too, thereby decreasing the interest rate.

Bonds are an important subject that all investors should know about, so we hope this overview was helpful!  In our next post, we’ll break down some of the terms you will often see associated with bonds that many investors find confusing.  In the meantime, happy spring!