I’m looking at the T-Bill Chart right now, and the 20-year bond has the best rate at 4.50%. I’m definitely not trying to hold my cash in a T-Bill for 20 years. Maybe just 2-6 months. Does it make sense for me to buy this 20-year treasury and then, when the time comes to make my cash liquid in 2-6 months, sell it on Schwab’s treasury auction? Is it possible to do that without losing money? Or should I just buy a 3-month T-Bill at 4.25% and let it mature all the way?
A 20-year bond is not a T-Bill. A Bill refers to an instrument with a maturity of less than 1 year. You can sell a bond anytime, but you might either gain or lose depending on how interest rates move. The only guarantee of a positive return is holding the bond to maturity. If you need the money in 6 months, buying a 20-year bond would be a bad choice. You might win or lose, but it’s more of a gamble.
@Teal
Yes, but the lost value is still technically present as part of the real return.
Yes, if rates drop. If rates drop by 0.25% on a 20-year bond, it will go up in value by about 5% when sold. No, if rates go up. If rates rise by 0.25% on a 20-year bond, it will drop in value by about 5% when sold. You should buy a bond that matures within your time frame, especially if that time frame is 2 to 6 months. A long-term bond is not a good choice in that situation.
Why not just invest in SGOV, which is a 0-3 month T-Bill ETF with a yield of over 5%?
Tate said:
Why not just invest in SGOV, which is a 0-3 month T-Bill ETF with a yield of over 5%?
Yields on SGOV are trending down because rates are falling. Right now, yields are closer to 4.5%. Long-term investments will give higher returns, but with more short-term risk.
Tate said:
Why not just invest in SGOV, which is a 0-3 month T-Bill ETF with a yield of over 5%?
Well, there’s always taxes on top of ETFs for selling, but I can try to calculate it out later to see if it makes sense.
@Darian
Explaining why people are downvoting your comment. Look at the price history of SGOV… capital gains or losses would be so small that the tax impact would likely be insignificant compared to other investment results throughout the year. Hope that helps!
@Melissa
Thanks for the explanation. How do you even buy SGOV? It looks like it’s always rising and dipping. Do you have to time it, buying when it’s low and selling when it’s high, or is there an automated process to guarantee that you get the full returns without having to time it?
@Darian
SGOV pays out dividends each month, and that’s why you see those dips in the chart. When dividends are paid, the price of the fund drops by the amount paid, so it’s all a wash. Because of this, you don’t need to worry about when you buy or sell SGOV. If you want to see a chart that shows your return if you buy SGOV, you need to find one that shows dividends reinvested, e.g., totalrealreturns.com.
@Darian
It doesn’t matter. It’s a wash. It dips because it pays out a dividend. It starts around 100, then as it accrues interest, it rises to around 100.25. Then, it declares a dividend of 0.25 and falls back to around 100. It really makes no difference when you buy or sell.
@Darian
Go to the ‘growth of 10k’ section, normally under performance. It’s just a diagonal line upwards. It assumes DRIP.
With the 20-year, you’re betting on a falling interest rate environment. It’s possible you could lose money if future rate expectations change and rates go back up (for example, if inflation returns). The safe thing to do is what you suggested, buy the 3-month bill which will match your need for cash.
Depends on what happens to rates after you buy.
A reminder that if the Fed lowers rates, it’s not the same as the 20-year rate going down. They only control the 3-month one. We control the rest.
Bevin said:
A reminder that if the Fed lowers rates, it’s not the same as the 20-year rate going down. They only control the 3-month one. We control the rest.
Well, technically they control the fed funds rate, which strongly influences short-duration T-Bills, but sure, that’s basically right.