Why invest in treasuries?
June 25, 2008 9:21 AM Subscribe
What's the advantage of treasuries over savings accounts?
A majority of my money is in the market, mostly index funds. I have some cash reserves as well (probably higher % than experts recommend for my age, but I'm overly cautious) currently sitting in a savings account.
Savings accounts currently pay 3-4%, but the yield on short term treasuries (under 5 years) currently seems to be below 2%. Even a 10-year note is only a slightly better investment, and that's assuming interest rates don't rise. Is there an advantage to treasuries that I'm missing?
A majority of my money is in the market, mostly index funds. I have some cash reserves as well (probably higher % than experts recommend for my age, but I'm overly cautious) currently sitting in a savings account.
Savings accounts currently pay 3-4%, but the yield on short term treasuries (under 5 years) currently seems to be below 2%. Even a 10-year note is only a slightly better investment, and that's assuming interest rates don't rise. Is there an advantage to treasuries that I'm missing?
Treasuries are money-good as long as the United States exists. The money in your bank account is only money-good so long as your bank exists.
For decades this wasn't really an issue, but given events of the past few months, t-bills are starting to look more attractive every day...
posted by ChasFile at 9:37 AM on June 25, 2008
For decades this wasn't really an issue, but given events of the past few months, t-bills are starting to look more attractive every day...
posted by ChasFile at 9:37 AM on June 25, 2008
Response by poster: (Assume I have less than the FDIC insurance limit in my account.)
posted by justkevin at 9:41 AM on June 25, 2008
posted by justkevin at 9:41 AM on June 25, 2008
Another disadvantage is liquidity. It's more accurate to compare a 10-year T-bill with a 10-year jumbo CD (where you will NOT get 4%). Treasuries are going down, though. Last year yield could expect 5%, this year maybe not 4.
posted by mattbucher at 9:48 AM on June 25, 2008
posted by mattbucher at 9:48 AM on June 25, 2008
Response by poster: Basically, what I'm hearing is that there isn't some hidden advantage to treasuries over a high-interest savings account that I'm missing? (e.g., I'm not calculating the effective difference in yields wrong or something)
posted by justkevin at 10:04 AM on June 25, 2008
posted by justkevin at 10:04 AM on June 25, 2008
Well, I think the main advantage is that interest on Treasury bills is exempt from state and local income taxes, so you'd have to earn more on the CD-pretax than you would on the Treasury to get the same outcome.
posted by mattbucher at 10:13 AM on June 25, 2008
posted by mattbucher at 10:13 AM on June 25, 2008
One positive not mentioned yet is that t-bill earnings are exempt from state and local income taxes. Depending on where you live, that might bump up the rate enough to edge out other options. Here's a calculator that will help you figure it out.
Back when t-bill rates were better and high-yield online savings accounts weren't as common, t-bills were often a smart move. For most people today though, a high-yield savings account will give you better rates and more liquidity.
posted by burnmp3s at 10:14 AM on June 25, 2008
Back when t-bill rates were better and high-yield online savings accounts weren't as common, t-bills were often a smart move. For most people today though, a high-yield savings account will give you better rates and more liquidity.
posted by burnmp3s at 10:14 AM on June 25, 2008
There is nothing stopping your bank from reducing the interest rate on your savings account down to 0.01% tomorrow. The Treasury note has fixed interest. The tax adjustment is important and serves to raise the effective rate depending on your tax bracket.
I agree that it is unlikely that your bank will default or lower your rate precipitously, and that even a blind bat can see that the Fed is about to raise rates, making today's Treasury a not very clever investment.
Even if you have less than the FDIC minimum in your account, a bank failure would tie that money up for months to years, during which time it will earn no interest and will not be available to you. Google "Resolution Trust Corporation" for an analogous situation from history.
The secondary market in Treasuries is pretty robust, so I don't agree that Treasuries are illiquid. (Of course, bond prices and yields move in opposite directions.)
Basically, what I'm hearing is that there isn't some hidden advantage to treasuries over a high-interest savings account that I'm missing?
You're right. "Backed by the full faith and credit of the U.S. Government" is a big deal to people who've seen other investments go to zero, though, especially in, say, the S+L debacle of 1989. I wouldn't discount that factor too much, especially not in a year where the Federal Reserve just bought an insolvent Bear Stearns, guaranteed its garbage CDOs as collateral, and gifted it to JP Morgan in order to prevent a massive cascade of bank failures.
posted by ikkyu2 at 10:29 AM on June 25, 2008
I agree that it is unlikely that your bank will default or lower your rate precipitously, and that even a blind bat can see that the Fed is about to raise rates, making today's Treasury a not very clever investment.
Even if you have less than the FDIC minimum in your account, a bank failure would tie that money up for months to years, during which time it will earn no interest and will not be available to you. Google "Resolution Trust Corporation" for an analogous situation from history.
The secondary market in Treasuries is pretty robust, so I don't agree that Treasuries are illiquid. (Of course, bond prices and yields move in opposite directions.)
Basically, what I'm hearing is that there isn't some hidden advantage to treasuries over a high-interest savings account that I'm missing?
You're right. "Backed by the full faith and credit of the U.S. Government" is a big deal to people who've seen other investments go to zero, though, especially in, say, the S+L debacle of 1989. I wouldn't discount that factor too much, especially not in a year where the Federal Reserve just bought an insolvent Bear Stearns, guaranteed its garbage CDOs as collateral, and gifted it to JP Morgan in order to prevent a massive cascade of bank failures.
posted by ikkyu2 at 10:29 AM on June 25, 2008
Even if you have less than the FDIC minimum in your account, a bank failure would tie that money up for months to years, during which time it will earn no interest and will not be available to you.
Not necessarily. When NetBank failed last year, ING Direct took control all of the existing customers' FDIC insured money immediately, so that there was absolutely no disruption in service. The customers were free to take the money out and close the accounts, or continue using banking services from ING Direct.
posted by burnmp3s at 12:11 PM on June 25, 2008
Not necessarily. When NetBank failed last year, ING Direct took control all of the existing customers' FDIC insured money immediately, so that there was absolutely no disruption in service. The customers were free to take the money out and close the accounts, or continue using banking services from ING Direct.
posted by burnmp3s at 12:11 PM on June 25, 2008
Best answer: You're asking two different questions, wrapped into one. You're asking why there's a yield difference, but then you qualify it by saying that you have less than $100,000 to invest.
For you (a retail investor with little investable assets) treasuries are tantamount to sticking your money under a mattress. It feels safer, but at the end of the day, you don't gain much, and you're giving up the attractive yields that are FDIC insured at banks.
For an institutional investor or high net worth individual, $100,000 in insurance is peanuts compared to the amount of money that could be lost (or tied up indefinitely) should a bank fail. So mutual funds, pension funds, filthy rich people, etc. buy treasuries. Treasuries are liquid, they're "safe", and they're a great place to park money.
In addition to being a place to park money, treasuries are used for a variety of other investment purposes, including sinking funds (for bonds with provisions), bond buybacks, speculation, to balance portfolios, etc. (I'm not a specific treasuries investor, so there are plenty of other reasons that I'm probably unaware of, but they aren't really germane to the point.)
So the reason why there is such a difference is that the two investments are used for almost completely different purposes, which is why Treasuries are so much more expensive. Remember, a bank uses CDs, deposits, etc. and loans it out to other banks, to make retail and commercial loans, to invest in itself, and for capital requirements. But banks can't live on multi-million dollar deposits; it lives on really small deposits by millions of people. So it has to offer a very, very competitive rate in order to stay in business. Treasuries don't operate that way.
posted by SeizeTheDay at 3:33 PM on June 25, 2008
For you (a retail investor with little investable assets) treasuries are tantamount to sticking your money under a mattress. It feels safer, but at the end of the day, you don't gain much, and you're giving up the attractive yields that are FDIC insured at banks.
For an institutional investor or high net worth individual, $100,000 in insurance is peanuts compared to the amount of money that could be lost (or tied up indefinitely) should a bank fail. So mutual funds, pension funds, filthy rich people, etc. buy treasuries. Treasuries are liquid, they're "safe", and they're a great place to park money.
In addition to being a place to park money, treasuries are used for a variety of other investment purposes, including sinking funds (for bonds with provisions), bond buybacks, speculation, to balance portfolios, etc. (I'm not a specific treasuries investor, so there are plenty of other reasons that I'm probably unaware of, but they aren't really germane to the point.)
So the reason why there is such a difference is that the two investments are used for almost completely different purposes, which is why Treasuries are so much more expensive. Remember, a bank uses CDs, deposits, etc. and loans it out to other banks, to make retail and commercial loans, to invest in itself, and for capital requirements. But banks can't live on multi-million dollar deposits; it lives on really small deposits by millions of people. So it has to offer a very, very competitive rate in order to stay in business. Treasuries don't operate that way.
posted by SeizeTheDay at 3:33 PM on June 25, 2008
If you are looking at Treasurys, then consider the TIPS. They provide a fixed yield, plus (or minus!) an adjustment for inflation*. Considering that the Federal Reserve is concerned about an increase in inflation, then these are probably a better option than regular Treasurys.
But as noted above, there's no compelling reason in your case to buy any government backed paper, unless you're feeling patriotic enough to give up cash for your country.
* The official government rate of inflation, which will be less than your real life inflation.
posted by Chuckles McLaughy du Haha, the depressed clown at 8:15 AM on June 26, 2008
But as noted above, there's no compelling reason in your case to buy any government backed paper, unless you're feeling patriotic enough to give up cash for your country.
* The official government rate of inflation, which will be less than your real life inflation.
posted by Chuckles McLaughy du Haha, the depressed clown at 8:15 AM on June 26, 2008
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posted by grouse at 9:29 AM on June 25, 2008