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Tales of a Technician: The Opportunity Cost of T-Bills

October 10, 2022

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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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