OK, I can understand investing in USTs; you get a constant (if low) rate of return with no risk of default. However, how does trading in USTs work? I can’t imagine there’d be that much fluctuation in price over the short term, so you’d need to be trading huge quantities in order to make money on the difference between the buy and sell prices. Wouldn’t any profits be eaten up in margin fees, or in the income potential the money has if it had been invested in other ways?
Someone, please explain.
The price of treasury instrument varies inversely with the interest rate. For long-term USTs even changes as small as one tenth of a percentage point can change the price significantly (i.e. by around 1 percent, very roughly calculated). So depending on what you mean by ‘huge’ quantities, and the amount of your fees, I think money could be made trading treasuries. The real issue is the fact that buyng/selling treasuries is a bet about the direction that interest rates will go, and if you are wrong, you lose money.
market interest rates change daily. If you have a bond for 10 years, tiny rate changes have pronounced effects on the resale value of the bond. Just like if you figure your mortgage at 7% then 6%, albeit in reverse.
For example, if you have a bond that pays 4%, and rates go up so that a new bond is paying 5%, no one will pay you face value for your bond. If rates fall to 3%, people will pay you a premium for your bond. If you hold it to maturity, you make 4% of course, but the profits and losses from trading occur when you sell it at a time when the market rate of interest is different from the fixed rate of interest inherent with your bond.