Personal Finance & Estate › Investing basics & strategy › Asset allocation (stocks, bonds, cash, real estate)
Bonds: Treasuries, T-bills, TIPS, I bonds & munis
· Concept or strategy
Standard practiceWhat most planners, CPAs and attorneys recommend.
Loans to governments or companies that pay set interest and return principal at maturity; Treasuries are backed by the US government.
See it on the Personal Finance & Estate map →How it works
Treasury bills mature within a year, notes in 2–10 years, bonds in 20–30. TIPS adjust principal for inflation. I bonds are savings bonds with an inflation-linked rate, limited to $10,000 per person a year at TreasuryDirect. Most municipal bonds pay interest free of federal tax. The main risk is interest rates: when rates rise, existing bond prices fall; a fund with a duration of 6 drops about 6% per one-point rise. In 2022 the US bond market lost about 13%, its worst year on record.
Why it matters for you
Bonds supply steady income and usually cushion stock crashes, giving a portfolio money to draw on without selling stocks low.
Think of it like
Like a long triple-net lease to a strong tenant: fixed payments, but its sale value falls when market cap rates rise.
Rules, limits and sources (2026)
Treasury and TreasuryDirect publish terms and rates; Bloomberg US Aggregate index data record the 2022 loss. Tax rules are in IRC Sec. 103 for munis and 31 U.S.C. 3124 for Treasuries.
Watch out for
Whether bonds will reliably offset stock losses when inflation runs high, as they failed to do in 2022, is debated.
Connections (4)
▸Bonds: Treasuries, T-bills, TIPS, I bonds & munis are the stabilizers in Asset allocation (stocks, bonds, cash, real estate)Standard practice
How they connect
Bonds are the steadying share of most allocations. High-quality Treasuries have often risen when stocks crashed, as in 2008 and early 2020, offsetting losses and supplying cash to rebalance into cheaper stocks. Shorter maturities reduce the rate risk that hurt bonds in 2022.
When it applies
The 60% stock / 40% bond mix became a standard for pensions and balanced funds in the late 20th century.
How sure?
Index data show intermediate and long Treasuries gained in 2008 while US stocks fell about 37%.
Watch out for
Whether stocks and bonds will keep moving in opposite directions when inflation is high, as they did not in 2022, is debated.
▸Sequence-of-returns risk is cushioned by Bonds: Treasuries, T-bills, TIPS, I bonds & munisStandard practice
How they connect
A crash early in retirement does lasting damage if stocks must be sold to pay bills. Holding several years of spending in bonds, T-bills or cash lets retirees draw from them during a downturn and leave stocks time to recover.
When it applies
Identified in William Bengen's 1994 safe-withdrawal research; 'bond tent' and bucket strategies refined by planners such as Michael Kitces and Wade Pfau.
How sure?
Historical simulations, from Bengen in 1994 to later work by Kitces and Pfau, show early losses drive most failed retirement plans.
Watch out for
How large the buffer should be, and whether shifting back toward stocks after retirement helps, are debated.
▸Bonds: Treasuries, T-bills, TIPS, I bonds & munis set the benchmark for Fixed-rate vs. adjustable-rate mortgage (ARM)Standard practice
How they connect
Mortgage rates track Treasury yields plus a spread for risk. Thirty-year fixed home rates follow the 10-year Treasury, typically 1.5–3 points above it; commercial fixed loans price off the 5-, 7- or 10-year Treasury or swap rate. ARMs reset off short-term rates, now usually SOFR, which tracks the Fed's policy rate.
When it applies
SOFR, published by the New York Fed since 2018, replaced LIBOR as the main ARM and floating-loan index between 2021 and 2023.
How sure?
Freddie Mac rate surveys and Treasury yield data, published weekly and daily, show the close relationship.
Watch out for
Why the mortgage-Treasury spread widened to about 3 points in 2023, versus about 1.7 historically, is debated; Fed mortgage-bond runoff, rate volatility and lender costs are all cited.
▸Bonds: Treasuries, T-bills, TIPS, I bonds & munis are partly exempt from California income tax (top rate 13.3%)Law or rule (2026)
How they connect
Federal law bars states from taxing interest on US Treasuries, including T-bills, TIPS and I bonds, and California exempts interest on its own municipal bonds. Out-of-state munis and corporate bonds are fully taxed by California, which matters at rates up to 13.3%.
When it applies
Applies to every California resident; funds pass the exemption through only if at least half their assets are exempt bonds at each quarter end.
The rule
31 U.S.C. 3124; Franchise Tax Board guidance on government and municipal interest; fund year-end tax letters list exempt percentages.
Watch out for
Whether a Treasury fund or a California muni fund pays more after tax depends on the bracket and yields at the time.