Money Sitting In The Bank? Consider Treasuries

Do you have a sizable amount of cash sitting in the bank earning almost nothing in interest? This could include your emergency fund, which may in some cases be as large as 12 months’ worth of expenses, though most of the time only 3 months’ worth needs to be immediately available. This could also include a down payment you may be saving up for a house or any savings intended for use in the near term but not right away. If this sounds like you, you may want to consider investing some of that cash in short-term treasuries.

For those who don’t know, treasuries are United States Treasury Securities. They are federal government debt (bonds) issued and sold by the Department of the Treasury to raise money. Since they are backed by the U.S. government, they are considered one of the safest investments with little to no risk of losing money if held to maturity. And although interest earned is taxable at the federal level, it is exempt from taxation at the state and local level.

Treasuries are categorized into three types based on time to maturity:

  • Treasury bills (T-bills) have the shortest maturities – 4, 8, 13, 26, or 52 weeks
  • Treasury notes (T-notes) have intermediate maturities – 2, 3, 5, 7, or 10 years
  • Treasury bonds (T-bonds) have the longest maturities – 20 to 30 years

You can read about other types of treasuries here.

New issues of treasuries can be purchased through TreasuryDirect at auction, or you can buy them on the secondary market through a brokerage like Charles Schwab or Fidelity. They are typically bought at a discount, and you get back the full face value upon reaching the maturation date. Some also provide interest semi-annually. All of this is factored into the Yield to Maturity (YTM), which allows you to evaluate different bonds based on the annualized yield you will receive if you hold the bond to maturity.

With interest rates rising, treasury yields are starting to become more attractive. While yields on treasuries at the beginning of the year were very small (only 0.40% for a 1-year T-bill and barely 2% for a 20 or 30 year T-bond), they have recently increased to over 2.5% for even a 1-month T-bill and 3.67% for a 1-year T-bill, as you can see below.

Treasury yields on 1/3/2022 (source: U.S. Department of the Treasury)
Treasury yields in September 2022 (source: U.S. Department of the Treasury)

You’ll notice that yields are currently higher for 1-year treasuries than for 2- through 10-year treasuries. 20-year treasury yields are only slightly higher. This is called an inverted yield curve, which you can read more about here. For those investing in treasuries, this means that short-term bonds are more favorable than long-term bonds. And if you are considering putting some of your cash in treasuries, short-term bonds are likely a better idea anyway.

Most of the money you save should be invested in stocks, since they typically have a higher rate of return over the long run. However, there are several cases in which saving money in cash or less volatile investments makes sense. This includes your emergency fund, which you need to have on hand in case of a large unexpected expense or loss of a job, and money you are saving for a down payment on a house. This is money you need either now or in the near future. You don’t want a stock market crash to deplete money you need. However, with treasuries, you don’t have to worry about market crashes. Your investment is backed by the U.S. government and you know you will get the return you are promised.

However, this is only true if you hold these treasuries to maturity. Selling your bonds early could result in a loss as rates change. For that reason, it makes more sense to only purchase treasuries that match your savings time horizon. For an emergency fund, you should have at least 3 months’ worth of expenses on hand. However, any savings beyond 3 months’ expenses could reasonably be invested in short-term treasuries. To be safe, a 3-month T-bill would allow the money to be available after depleting the 3 months’ worth saved in the bank. On the other hand, if you are saving for a large purchase like a down payment in a set number of years, you could invest that money in treasuries matching that time span. If you want to buy a house in 3 years, you could buy 3-year T-notes. However, since 1-year yields are currently higher than 3-year yields, it would be better to go with 1-year T-bills at the moment, which also allows the money to be available sooner just in case.

You may be thinking that CDs (certificates of deposit) may be an even better option, as they are also backed by the government. However, due to the rising rate environment, the rates on CDs are currently lower than treasury yields (and that’s not even taking into account the tax benefits of treasuries). Plus, CDs are less liquid than treasuries, which can be an issue if you need access to your money sooner than you anticipate.

CD yields through Charles Schwab as of 9/11/2022

Again, investing your cash in treasuries only makes sense in certain cases. Most people, particularly with long investment horizons, would be better suited investing in equities, especially in a down market like we are experiencing at the moment. But for those looking for risk free returns, treasuries are better than keeping all your money in cash.

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