Tess Vigeland: So with the news of a downgrade from Standard and Poor’s, we thought it might be helpful to do a very basic explainer of the bond market. What, exactly is a bond, a Treasury, a T-bill?
So we’re joined by a good friend of the show. Stuart Ritter is a financial planner in T. Rowe Price’s Financial Planning Services Group. Thanks for being with us again.
Stuart Ritter: Thank you for having me, Tess.
Vigeland: Let’s talk bonds.
Ritter: OK.
Vigeland: Shaken, not stirred. Explain for us what is a Treasury.
Ritter: A Treasury is simply the name given when you loan money to the U.S. government and get paid back interest and the original principal that you loaned to them. Sometimes the term “Treasury” is used to mean all the different kinds of bonds you can buy from the federal government, and sometimes it’s used to describe very specific kinds of bonds.
Vigeland: Like the 10-year T-note that we always hear about.
Ritter: Exactly. But there’s also savings bonds, there are I-bonds, there are lots of different kinds of bonds you can buy from the federal government. And often when people talk about Treasuries, what they’re really referring to is a loan you make to the federal government and have them pay you back.
Vigeland: And in general, we think of bonds as very stable.
Ritter: We do.
Vigeland: As good as cash.
Ritter: It depends on how long the bond is, which I know is getting a little bit complicated, but for a bond where the promise is to pay you back in a short period of time, that generally is what people are referring to when they say cash. But a bond that isn’t paying you back for five years or 10 years or 30 years, now we’re getting into a different realm. So when we’re talking about short-term, it’s money that you’re getting back relatively soon.
Vigeland: One of the issues that has come up recently with this whole mess over the debt ceiling was talk about the AAA rating. What does that AAA rating mean, and what does it mean if it goes away?
Ritter: For individual investors, it’s important to recognize that there are organizations, credit ratings agencies, that assign letters to different bonds from all kinds of entities that give you a sense — at least in their opinion — of the likelihood that the bond is going to do what it says it’s going to do. When you’re putting your bond portfolio together, we get back to that idea of diversification: that you want to hold lots of different kinds of bonds and lots of different ratings so that if something bad happens to one part of it or one bond, you haven’t lost most of your money because that’s where you put it.
Vigeland: All right, well, as we know, bonds have been in the news quite a bit lately so thanks for coming in and helping us to understand Treasuries today.
Ritter: Anytime.
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