Tales of a Technician: The Opportunity Cost of T-Bills
October 10, 2022
Today’s video looks at the sizzling rate of return available on Treasury Bills and why it isn’t as compelling as you might think.
Opportunity Cost of T-Bills
Principle: When interest rates move, it changes the tradeoff between asset classes.
Asset Classes: Cash (T-Bills), Bonds, Stocks
Low interest rate: Fed Funds rate near zero, T-bills near zero
Cash: Unappealing – low or no rate of return.
Bonds: Unappealing – low yield & if rates rise, these fall a lot
Stocks: Appealing – TINA – they offer upside whereas the alternatives do not.
High interest rates: Fed Funds rate 3% to 4%, T-bills near 3% to 4%
Cash/T-bills: Appealing. Offering 3.5% to 4%, risk-free.
Bonds: Appealing. Ten-year offering 4%. Even more if interest rates fall.
Stocks: Not appealing because the alternative looks really good.
A) TRUE, if stocks are expensive at an all-time high and I can dodge a potential bear market and sit in t-bills to wait for a fat pitch.
B) FALSE, if stock are already cheap.
Multiple Choice for 1 year:
A) Park money in T-bills for 3% to 4%.
B) Park money in 10-year treasury (IEF) and get 2% to 4%
C) Buy S&P 500 25% off the highs or IWM 33% off the highs + get yield near 2%
Despite the high interest available in risk-free instruments, stocks are still appealing if you have a long time horizon.
Time horizon is the key.
Short-time horizon and you really need the money. Then sure, T-bills are interesting.
Longer-term horizon. You’re foregoing buy stocks at a discount that you only see 1x to 2x a decade because you want to grab the 3% to 4% available in T-bills.
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