Treasury bill/note ladder vs SHV/SHY

[BearBones]

Trying to best allocate the cash in my PP. Two questions arise:

Treasury Direct vs. SHV/SHY?  A ladder through Treasury Direct has less counterparty risk, but it is also less liquid (or at least conveniently accessible). One of the purposes of cash is liquidity, either for an emergency or for rapid investment. I am tending to put convenience/liquidity ahead of counterparty risk, therefore favoring the ETFs.

SHV vs. SHY? Is the additional yield worth the interest rate risk of SHY when yields for both are so incredibly low?

I realize that both of these questions are subjective, but I appreciate any advice others could give. Thanks!

[craigr]

At some point the inconvenience of doing things vs. the risk is going to come into play. Personally I don't have a problem with the iShares products.

However many brokers (like TDAmeritrade, etc. ) have bond desk GUIs that allow you to quickly setup your own t-bill ladder. May be a good hybrid option to keep the convenience of the broker, but the more direct ownership of a ladder.

[stone]

Would another option be to have "deep cash" in directly held treasury bonds and simply use a bank account (or SHV) for convenient easily accessible "quick cash" for rebalancing? A bit like how some people hold some gold ETF for rebalancing but use coins for the bulk of the holding.  I agree that SHV going kaput is probably unlikely but a standard (rather than too good to be true Icesave type) bank account is probably also safe for anything less than the government guarenteed amount isn't it?

[melveyr]

Have you already maxed out your savings bonds for the year? That is a very tempting option as well. It is not liquid for the first year, but the tax deferral and free lunch yield are a nice compensation.

I personally do a mixture of savings bonds and a sprinkle of FDIC savings accounts.

[BearBones]

Would another option be to have "deep cash" in directly held treasury bonds and simply use a bank account (or SHV) for convenient easily accessible "quick cash" for rebalancing? A bit like how some people hold some gold ETF for rebalancing but use coins for the bulk of the holding.  I agree that SHV going kaput is probably unlikely but a standard (rather than too good to be true Icesave type) bank account is probably also safe for anything less than the government guarenteed amount isn't it?

Stone, I am reluctant to go out too long for the cash portion in the PP, given historically low yields and the fact that I already have LTTs as an asset in the PP. Correct me if you see otherwise. Bank account may be more safe than most money market funds, since FDIC "insured," but I am assuming that FDIC still higher risk than counterparty risk of SHV. As I see it, risk of cash may be Treasuries via TD < Treasuries through brokerage < SHV/SHY < FDIC insured account < non-FDIC insured account.

Have you already maxed out your savings bonds for the year? That is a very tempting option as well. It is not liquid for the first year, but the tax deferral and free lunch yield are a nice compensation.

Melveyr, I'm maxed out on iBonds. The EE bonds are yielding only 0.6% and are locked up for a year, so I have not seen the benefit (perhaps unless one can hold 'till maturity, and I am a bit too old for that). But perhaps I should rethink this? Perhaps a 0.6% treasury yield is better than 0.9 at the bank?

[melveyr]

The illiquidity is a valid reason to not consider them. However, the 1 year note is only giving .13% so that .6% is not all bad. To be perfectly fair, if redeemed after a year you would only get .45% (last three months interest taken out) but that is still better than the free market yield. I personally see it as a free lunch worth taking. They have contribution limits for a reason

[BearBones]

Well put. So I will get some EE bonds.

How about second question: Any reason that anyone choosing SHY over SHV at this point?

[AdamA]

How about second question: Any reason that anyone choosing SHY over SHV at this point?

There is still some interest rate risk with SHY, so if you had to sell it for some reason (to rebalance or for an emergency) right after an interest rate hike you could still take a loss.

That's why Craig recommends that if you use slighter longer term notes, you should still have some short term T-bills so you can wait out  the duration of the notes to avoid the loss.  You might do something like 50% SHV and 50% SHY.

[Lone Wolf]

Treasury Direct vs. SHV/SHY?  A ladder through Treasury Direct has less counterparty risk, but it is also less liquid (or at least conveniently accessible). One of the purposes of cash is liquidity, either for an emergency or for rapid investment. I am tending to put convenience/liquidity ahead of counterparty risk, therefore favoring the ETFs.

Personally, I've enjoyed building a 0-3 year Treasury ladder for the bulk of my cash.  With both Fidelity and Vanguard now offering free trades on Treasury securities, this gives you some good options for building a ladder that has a bit more liquidity and convenience than you might get with TreasuryDirect.

The ETFs are very good products and I find them very handy for smaller chunks of cash.  An expense ratio of 0.15% is very reasonable.  Still, if setting up a ladder is something that you would enjoy, there's not much reason to pay someone 15 basis points to just park Treasury Bills for you.  For SHV, this is generally going to mean a negative nominal yield, something I find to be a bit of a psychological irritant.

It also feels good to remove one more layer of separation between you and your securities.

SHV vs. SHY? Is the additional yield worth the interest rate risk of SHY when yields for both are so incredibly low?

I can definitely understand the sentiment.  You are not "richly rewarded" for holding 3-year Treasuries.

Still, I've stuck with the more "SHY-like" 0-3 year ladder after looking at what played out in 1981's interest rate spike.  I observed that the ladder allows you to reinvest your maturing "rungs" at the new "spiked" interest rates as 3-year T-notes.  This set the cash segment up for a comeback in future years.

I wrote about my observations on 1981 in this post on Treasuy ladders.

As for SHV, with rates this low, SHV's expense ratio exceeds the yield of T-bills.  If I could securely hold physical cash, I might be tempted to prefer that to SHV.  This would actually beat SHV (at current rates) and is the ultimate in liquidity.