Taking Another Look at T-Bills

I’ve written before about some ways we have tried to have our savings keep up with (or at least close to) inflation. One thing I didn’t list was bond mutual funds, which often are considered a fairly safe place to put money that will typically earn better-than-a-savings-account yields. That’s because at the time of that writing, the future yields on bonds were actually predicted to be negative, because of the very low interest rates and the expected increase in interest rates. While interest rates have risen a bit, and future expected yields on bond mutual funds are likely to be positive, there is still some risk involved in putting new, short-term money into a bond fund.

This has become newly relevant to us because my 92-year old Mom has now moved in with us and is selling her house (it will hopefully close by the end of this month). As a result, she is going to have a fairly significant (for her) infusion of cash that we’ll have to figure out what to do with. She currently has a small teacher pension, an inherited IRA from my Dad, and a taxable brokerage account, as well as a fair amount (probably too much) in a high-yield savings account. The IRA and brokerage account are managed by someone else (a lot of history there) and, at the moment at least, we will likely leave that money there. But I don’t think we’ll add this new money to that taxable brokerage account because I feel comfortable investing it ourselves without paying the management fee. She already has plenty (too much, probably), in her high-yield savings account and her monthly expenses will actually decrease fairly significantly now that she’s moved in with us. So for the short-term she doesn’t really need the money, although there’s always the possibility of long-term care what could eventually necessitate the need to tap into this.

Which brings me to the dilemma. How to invest this money in a way that makes sense and has at least the chance of keeping up with inflation, but within the parameters of not taking on too much risk and having the money available in the relatively short-term should the need arise for long-term care? Series I Bonds are an obvious choice but, unfortunately, have a $10,000 per person per year limit. While I’m comfortable putting some of the proceeds from her house sale into equities (VTSAX and VTIAX) and feel like they will likely be worth more in 12 months, 24 months, etc., no one knows for sure so I certainly don’t want to put all of it in there in case we need to tap into it for long-term care. While bond mutual funds are likely to have a positive yield over those time periods, the interest-rate environment is still uncertain enough that it’s a bit iffy. While high-yield savings rates have finally started to rise (1.4% at Ally), that still seems like a lot to give up relative to inflation.

So it was somewhat fortuitous that I recently read this post by Rubin Miller at Fortunes & Frictions talking about Treasury Bills and Notes.

But the risk-free rate is a very narrowly defined opportunity cost, and is the same for everyone: the risk-free rate measures the riskless opportunity cost of a purchase or investment.

It asks, what is the return on a zero-risk investment, instead?

It’s the perfect starting place to benchmark any purchase decision, and it’s framed in reference to your expected holding period.

He goes on to say,

The risk-free rate is the yield on a U.S. treasury bill of the same maturity as your investment horizon.

Now, this isn’t “news” to me, but it was a good reminder that there is a way to buy bonds with essentially no risk. Instead of buying a bond mutual fund, buy Treasury Bonds (called “Notes” for durations of a year or less). 26- and 52-week Treasury Notes are hovering right around 2.8 – 3.0% right now (and the interest is tax free at the state and local level). Now, that still doesn’t keep up with (current) inflation, but if inflation comes back down it might get close, and it’s certainly more than the 1.4% you can get on a high-yield savings account. (Update: As of January, 2023, 6 and 12-month notes are right around 4.7%.)

That eventually led me to this post by Harry Sit on The Finance Buff that steps you though how to purchase Treasury Bonds through several of the major brokerages (Vanguard, Fidelity, Schwab). You can, of course, also purchase them directly from the U.S. Government (at the, ahem, “retro” Treasury Direct site), but most folks are likely to prefer to do it from their brokerage so that they can easily redirect the funds to other investments when it’s time, or sell them on the secondary market if you don’t want to hold them to maturity (you can’t sell them on the secondary market if you hold them at Treasury).

Some of you may be wondering, “Well, why not just purchase a CD at a bank?”

When the Federal Reserve started raising interest rates, the financial markets responded right away. Banks and credit unions are still slow to raise the rates they pay on savings accounts and CDs because they don’t need more deposits and they rely on people’s inertia and ignorance of the going rates.

In addition, Treasuries are guaranteed by the full faith and credit of the U.S. government, they require a low minimum investment of only $1,000, the interest is exempt from state and local income taxes, and you can buy them in your existing brokerage account. Why in the world would someone buy CDs from banks and credit unions that pay a lower yield than Treasuries?

Because investors don’t know they can buy Treasuries so easily for a higher yield than CDs at this moment.

For comparison, at Ally right now a 6-month CD is paying 1.25% and a 12-month CD 2.2%. And at many banks, it’s likely to be even lower than that.

The post does a nice job of taking you step-by-step through how to buy the notes/bonds through those brokerages, but it will still be up to you to decide which duration to purchase and how much to invest. We haven’t made a final decision yet and won’t until we actually have the proceeds from the sale of the house, but I suspect we’ll invest a significant portion of the house proceeds in 26-week notes in order to achieve higher returns than high-yield savings, but also not lock in the interest rate for too long. (Or lock in the money, because while you can sell them on the secondary market at any time, you do then have the risk of losing money or receiving less than you anticipated – or of course you could also receive more.) We’ll still invest some in equities for the potential for growth that exceeds inflation, but given her age and circumstances we don’t want to risk too much there. By combining some equity exposure with Treasury Notes, we will hopefully hit the sweet spot for our circumstances.