There's a safe haven hiding in plain sight

Whatever happens, we'll have the best Congress money can buy.

If you're nervous, alarmed or hysterical about what's going on in Washington and on Wall Street right now, there is at least one safe haven you can buy today that is effectively guaranteed to ride out any storm. And it is currently paying 4.7% interest.

I'm talking about U.S. Treasury bonds - IOUs issued by Uncle Sam - that come due in early 2029, shortly after the (scheduled) end of the Trump administration.

No matter what happens in U.S. politics or finance, the chance that the U.S. government would default within the next three years is effectively nonexistent.

Famous last words? Even the gloomiest prognosticator doesn't see a fiscal crisis being realized in anything like that time frame.

Yet the panic about the budget, combined with panic about inflation and everything else, has driven the interest rate available on 3-year Treasury bonds to remarkably high levels.

The best rate available at the moment is on the Feb. 15, 2029 "zero-coupon" Treasury bonds (CUSIP: 912833XN5), which will pay you 4.7% a year between now and when it comes due. That will be less than a month after America gets a president who doesn't think the appropriate response to a war, $100-a-barrel oil and a U.S. fiscal crisis involves renaming Lake Ontario, threatening Iceland or trying to bribe voters with $5,000 of their own money.

A zero-coupon Treasury bond can best be understood as one that doesn't pay interest as it goes along, but pays you the full amount - return of principal, plus all the accumulated interest - on the due date.

In this case, if you invest $1,000 in the bond, you will get back about $1,118 soon after President Vance, Rubio, Ocasio-Cortez, Beshear, Whitmer, MTG or Laura Loomer is sworn in.

Most of the time, you can sleep even easier if you buy inflation-protected Treasury bonds instead of regular Treasury bonds. These bonds, known as TIPS, use a complex system to ensure that you are compensated no matter what happens to consumer prices over the life of the bond. Right now, the April, 2029, 3.875% TIPS bond 912810FH69 will pay you 2.3% a year plus inflation over the life of the bond.

As inflation is currently running at over 3% a year, if this persists you'd earn 5.3% a year. Inflation would have to average less than 2.4% a year over the next two-and-a-half years for these bonds to work out worse than the regular 4.7% Treasurys mentioned above.

You can count me skeptical about that.

If you have a tax-sheltered account, such as an IRA, or a 401(k) that allows you to direct your own investments, that's the best place to hold taxable bonds such as Treasurys and TIPS. Bond interest is taxed federally at ordinary income-tax rates, which are usually higher than the tax rates on stock dividends and long-term capital gains.

At the moment, TIPS bonds pretty much across the board look like that extremely rare bird on Wall Street: a one-way bet. Those which come due within the next 10 years currently offer yields, or interest rates, of annual inflation plus up to 2.5% a year.

Even if you fall into the camp of those who think the U.S. fiscal crisis might end in outright default, you have to take a very extreme view to think that is likely to happen within the next 10 years. Even the April 2032, 3.375% TIPS bond 912810FQ68 is paying more than inflation plus 2.3% a year. How, exactly, would the U.S. default before 2032? (And, just as relevantly - even if that happened, what would happen to all your other investments?)

TIPS bonds that mature over 20 or even 30 years offer still better interest rates of up to 3.1% plus inflation per year. Such guaranteed rates are exceptionally rare by historical standards. (I've written about them before.)

Fears about U.S. budget deficits are rising, and these bonds may be subject to plenty of volatility. Bonds are like seesaws, so if the price falls, the yield rises. There is nothing to stop these bonds getting still cheaper in a panic about the U.S. Treasury market, and the yield rising still further.

But the only circumstance where they turn out to be a poor investment if you held them to maturity would be in the case of an actual U.S. government default. Those who think a default is a plausible outcome may be looking only at finances and forgetting the politics.

As we all know, the U.S. is an effective plutocracy. The richest 1% of families own about a third of all national wealth, and the richest 10% own two-thirds. What are the chances they would stand idly by while Congress and a president allowed a financial collapse, wiping out most or all of their net worth? The chances seem pretty slim from where I'm sitting.

The wealthy fought relentlessly for the big tax cuts of 2001, 2017 and 2025. But the money they made from those cuts would pale compared to the amount they'd lose in a crisis caused by a U.S. Treasury default. It's not even close. Ultimately they might even agree - eek! - to paying taxes like everyone else if that's the price of not getting wiped out. They know that 100% of nothing is nothing.

A stealth default by higher inflation looks like a likelier part of a long-term budget solution. Which, of course, would be good for TIPS as well.

-Brett Arends