Treasury Funds
Treasury Funds
Treasury bond funds offer pure exposure to U.S. government debt, segmented by maturity and duration. Treasury-only funds eliminate credit risk and allow precise control over interest rate sensitivity.
Key takeaways
- Treasury funds hold only U.S. government debt (Treasuries and TIPS), eliminating credit risk entirely.
- GOVT (iShares U.S. Treasury ETF) holds broad Treasury exposure across all maturities; VGIT (Vanguard Intermediate-Term Treasury ETF) focuses on 3-10 year maturities; TLT (iShares 20+ Year Treasury ETF) captures long-duration Treasuries.
- Duration buckets allow investors to position for interest rate expectations without being forced into corporate or MBS exposure.
- Treasury funds typically have expense ratios of 0.03-0.07%, slightly higher than aggregate funds but still negligible.
- Treasuries' lower yield than corporates and MBS is offset by credit safety and often attractive valuation during economic stress.
Why Treasury-only funds matter
The aggregate bond fund holds a mix: roughly 40% Treasuries, 26% mortgage-backed securities, and 22% corporate bonds. For many investors, this mix is ideal. But some have reasons to prefer a Treasury overweight:
A retiree in a low tax bracket living off bond distributions may prioritize safety and simplicity over yield. Treasuries are the safest asset, backed by the full faith and credit of the U.S. government. In an economic downturn, Treasuries rally (prices rise) because investors flee to safety, even as corporate bonds and MBS sell off.
An investor constructing a bond allocation in their taxable account might want to isolate the most tax-efficient bonds in that account while holding higher-yielding (but less tax-efficient) corporates and MBS in a 401k. Treasury distributions are purely interest income; there is no accrual of capital gains that create tax friction.
An investor with strong interest rate views might want to tilt exposure. If you believe rates are heading lower and want maximum duration (price appreciation from falling rates), holding Treasury funds with longer durations than the aggregate fund would amplify that exposure.
Conversely, if you believe rates are rising and want to limit downside, Treasury short-duration funds lock you into a known duration profile without the prepayment uncertainty of MBS.
GOVT: Broad Treasury exposure
GOVT (iShares U.S. Treasury ETF) is the simplest Treasury option. It holds Treasuries across the full maturity spectrum, from 1-year bills to 30-year bonds, weighted by market value. Its duration is typically around 5-7 years, depending on the current yield curve shape.
As of early 2025, GOVT's expense ratio is 0.04%, and it trades with tight bid-ask spreads (typically $0.01 per share). GOVT has over $50 billion in assets, making it exceptionally liquid. Its composition as of early 2025 approximates:
- 20% bills and short-term Treasuries (under 1 year)
- 35% intermediate Treasuries (1-10 years)
- 30% long Treasuries (10-20 years)
- 15% very long Treasuries (20-30 years)
GOVT's broad exposure makes it a useful "Treasuries everywhere" holding. If you want Treasury-only exposure without taking a stance on maturity, GOVT is the fastest way to get there. It is also useful as a ballast for higher-yield bond holdings. An investor holding 70% aggregate bond fund and 30% high-yield corporate bonds might add a GOVT position to tilt the overall portfolio toward safety.
VGIT: Intermediate Treasury focus
VGIT (Vanguard Intermediate-Term Treasury ETF) narrows the scope to Treasuries with 3-10 year maturities, typically 3-6 year duration. This maturity bucket is the "Goldilocks" of the Treasury market: longer than the flat-yield short end (where bills and 2-year notes have similar yields) but shorter than the long end (where duration risk is acute).
VGIT's expense ratio is 0.05%, and it holds roughly 200-300 Treasury issues from the 3-10 year part of the curve. For an investor wanting stability and yield without the volatility of long Treasuries, VGIT is the right choice. As of early 2025, VGIT yields around 3.8-4.0% annually, slightly lower than the aggregate fund's 4.2-4.5% but with lower credit risk and lower duration risk than corporate bonds.
Over the past 10 years (2014-2024), VGIT returned about 1.8% annualized, modestly below the aggregate fund's 2.3% due to its lower yield. But that 0.5% annual difference is entirely explained by credit risk: VGIT avoided the default risk of corporate bonds and the prepayment complexity of MBS.
VGIT is a sensible core holding for a Treasury-focused investor or as part of a ladder strategy (holding short, intermediate, and long Treasuries separately). It is particularly useful for someone saving for a specific goal 5-10 years in the future and wanting to own bonds that mature around that date.
TLT: Long Treasury exposure
TLT (iShares 20+ Year Treasury ETF) holds Treasuries with 20+ year maturities, delivering roughly 14-16 year duration. Long Treasuries are the most interest-rate-sensitive bond category. When rates fall 1%, long Treasury prices rise about 14-16%; when rates rise 1%, prices fall that much.
This sensitivity is both a feature and a risk. A tactical investor who believes rates are heading lower would buy TLT to capture outsized capital gains. During the 2020 pandemic-driven rate cut, TLT surged 30%+ as 30-year Treasury yields crashed from 2.5% to under 1%. An investor holding TLT made enormous returns.
But when rates rise, TLT can lose 10-20% in a year. Over 2022, TLT fell 27% as the Federal Reserve raised rates aggressively. For a risk-averse investor, this volatility is uncomfortable.
TLT's expense ratio is 0.06%, and it yields about 4.0-4.3% as of early 2025 (lower than VGIT and GOVT due to lower coupon rates on very long bonds, offset partly by price appreciation potential). Over the past 10 years, TLT returned about 1.2% annualized, significantly below both VGIT and GOVT, due to the long-bond rally of 2022-2024 (when TLT recovered strongly from its 2022 losses).
TLT is a holding for investors with strong interest rate convictions. A retiree or investor nearing retirement who believes rates are heading higher might avoid TLT entirely. A young investor who believes rates are heading lower might make TLT a core holding. Most investors are better served by GOVT or VGIT, which eliminate the need to guess the direction of long-term rates.
Treasury fund selection: TIPS considerations
The funds above are nominal Treasuries. A separate category exists for TIPS (Treasury Inflation-Protected Securities), which offer real (inflation-adjusted) returns rather than nominal returns. Some Treasury funds mix nominal and TIPS; others are pure nominal or pure TIPS.
GOVT includes a small allocation to TIPS (roughly 10-15% of the Treasury portion of the portfolio), reflecting TIPS' weight in the Treasury market. Pure TIPS funds, such as VTIP (Vanguard Short-Term TIPS ETF), hold only TIPS. The choice between nominal and inflation-protected Treasuries is a separate decision explored in the TIPS chapter.
Duration precision and laddering
For investors with specific time horizons, Treasury funds enable maturity laddering. An investor with $200,000 to invest in Treasuries over a 10-year horizon might allocate as follows:
- $20,000 to 1-year Treasuries (or a short Treasury ETF)
- $20,000 to 2-year Treasuries
- ... (continuing in $20,000 increments)
- $20,000 to 10-year Treasuries
This ladder ensures a predictable, diversified maturity profile and avoids the need to time the market or forecast rates. As the 1-year Treasury matures, the proceeds roll into a new 10-year bond, maintaining the ladder shape.
Treasury funds don't directly enable laddering (they hold all maturities), but they are useful for approximating a ladder's behavior with minimal effort. An investor who doesn't want to manage 10 separate positions can simply hold VGIT (which delivers a blend of 3-10 year maturities, approximating the middle of a typical ladder) and rebalance annually.
Tax efficiency and account placement
Treasury distributions are pure interest income; there is typically no capital gains component (unless you sell at a loss, triggering a loss). In a taxable account, this is advantageous compared to corporate bonds (which may generate capital gains) or MBS (which have complex tax treatment).
However, Treasury interest income is ordinary income taxed at your marginal rate, not preferentially taxed. So Treasury funds are still suboptimal in taxable accounts compared to holding them in tax-deferred accounts like a 401k or traditional IRA, where distributions compound untaxed.
Credit safety and flight-to-quality
During economic stress, Treasury funds exhibit "flight-to-quality" behavior. In March 2020 when corporate spreads widened 400+ basis points and MBS trading halted, Treasury prices surged. An investor holding 100% GOVT would have experienced capital gains even as their overall portfolio held its value or appreciated.
This is the core value proposition of Treasuries in a diversified portfolio: they are the ultimate safe asset. When everything else sells off, Treasuries typically rally. Over many economic cycles, this rebalancing effect (buying Treasuries when they rally, selling them to rebalance into falling assets) compounds into meaningful outperformance for balanced portfolios.
Yield comparison
As of early 2025, the Treasury yield curve looks roughly like this:
- 1-year: ~5.0%
- 3-year: ~4.5%
- 5-year: ~4.2%
- 10-year: ~4.1%
- 20-year: ~4.3%
- 30-year: ~4.4%
The 1-3 year part of the curve is flat or inverted (short rates higher than long rates), a consequence of high short-term rates from Federal Reserve tightening. VGIT (holding 3-10 year bonds) captures the middle of the curve at yields around 4.0-4.2%. TLT captures the long end at slightly higher yields.
For an investor prioritizing yield, VGIT offers the best risk-adjusted return—meaningful yield without the duration risk of TLT. For an investor prioritizing safety, VGIT also wins—shorter duration than GOVT means less interest rate risk.
Next
Treasury funds are the simplest way to access pure government debt. But many investors need yield above Treasury levels. Corporate bond funds provide that yield by taking credit risk. The next article explores how corporate bond funds work and when to include them in a portfolio.