Laddering T-bills

[greg9840]

Hello everyone,

Harry Browne consistently recommended that people use Treasury backed money markets for the cash portion of PP.  These types of accounts are hard to come by, and the fees typically exceed the interest being paid, I believe.  So, since Treasury backed money market accounts currently aren't a good option right now, what t-bills will closely mimic a money market account?  If I were to put 100% of my money into t-bills that are coming due in 7 days, and just keep rolling 100% of it over every 7 days, would that perform at least as well as, or better than, a Treasury backed money market account would?

I know there are other options that involve using 1 to 3 year Treasuries, instead, or just buying 1 year Treasuries once a year, but I don't want to take the extra interest rate risk.  In an environment of rapidly rising interest rates (which may happen soon, or may not happen), I would think that a money market might do much better because you aren't locked in at a relatively low rate for an extended period of time.  So, I feel that buying 1 to 3 year Treasuries is like making a bet that there won't be a rapid increase in interest rates soon.  I know back-testing over the past 40 years shows that 1 to 3 year Treasuries outperform a money market account.  But the next 40 years could end up being very different than the last 40 years, possibly due to our massive increase in the money supply in recent years.  Once that money gains some velocity, interest rates could skyrocket.  Or, that might not happen.  But I don't think, when you look back at the past 40 years, we ever tripled our money supply, practically overnight, during that time.  So, I think we may be in uncharted territory which might make back testing less useful.  Does my logic make sense?

Thanks!
Greg

[rickb]

The return for a rolling 7-day ladder of t-bills would be at least close to a treasury backed MM and my guess is Harry Browne would heartily approve.  The MM will have an expense ratio but MM's typically have a longer maturity than 7 days (more like 1-3 months).  The ladder is a direct investment in t-bills, eliminating the (remote, but definitely non-zero) chance of something bad happening to the fund.

Regarding very short t-bills vs. 1-3 year treasuries, realize using 1-3 year treasuries is a modification of Browne's original advice based as much on a prediction for the future as your notion that interest rates might (or might not) skyrocket.  Rule #4 applies here -"No one can predict the future".  Those using 1-3 year treasuries are betting they'll be better off in the long run with the higher interest rates at the potential expense of a short term hit (principal and/or lost interest) if rates spike upward.  If you're not comfortable making that bet, then by all means don't.  My advice would be to understand when you're acting based on a prediction, figure out what happens if your prediction is wrong, and decide if you're comfortable with either outcome.  In this case, it sounds like you are.

[Ad Orientem]

Cash, especially with interest rates this low, is a negative gain asset. It sucks but that's where we are in the FEDs money printing fantasy land. My best advice is to go with BIL, SHV or something similar. Another low cost alternative is to just hold your cash in... actual CASH. As in green colored pieces of paper with numbers and pictures of dead presidents on them.

[smurff]

There are always I-bonds for money you know you won't need for rebalancing over at least a year, AKA "deep cash."

[greg9840]

I don't think I understand how I-bonds work.  How do I-bonds compare to T-bills?

[sophie]

There are many threads on this forum regarding I Bonds.  Like T-bills, they are backed by the full faith and credit of the U.S. Government, and they will preserve the value of your investment.  Unlike T-bills, their return depends on the inflation rate as measured by the CPI-U.  That plus the tax deferral on the interest makes them the best deal going for cash savings right now.

Because I Bonds cannot be cashed for one year after purchase, and because you'd have to pay taxes on all the accumulated interest when you sell them, most people view them as a long term holding.

Nice touch to compare 4 week T-bills to money market returns.  If you divide your savings by 4, buy a 4 week T-bill every week and set it for auto-rollover (Fidelity and Treasury Direct have the best auto-roll programs, but you can do it at most major brokerages), you have the equivalent of a money market account with better returns and great liquidity.

[Austen Heller]

Regarding very short t-bills vs. 1-3 year treasuries, realize using 1-3 year treasuries is a modification of Browne's original advice based as much on a prediction for the future as your notion that interest rates might (or might not) skyrocket.  Rule #4 applies here -"No one can predict the future".

Sage advice.  I am a big fan of treasuries compared to CDs, and I had been considering stashing some cash in the Vanguard Short-Term Treasury Fund (VFISX), but there seems to be no point.  VFISX has a duration of 2.4 years and an annual yield of 0.26%, and the NAV has dropped -0.66% since just the beginning of May  .  Why take any risk at all with an instrument like this?  Just stuff the cash directly into a T-bill ladder and be done with it - at least until yields get a bit further away from 0%.