It's midway through 2024 and short term Treasury bills (those with a duration of less than 12 months) are one of the most exciting investments in my toolbox. Exotic? No. But they make me giddy because a nearly risk-free annual rate of return of over 5% seems almost too good to be true.
Late last year I was able to purchase a 20-year Treasury bond with an interest rate of over 5%. I live in California where my marginal state tax rate is 9.3% (for those who earn more income than I do the rate can be even higher). Since Treasury bill and Treasury bond interest is exempt from state income tax, it doesn't matter what state I live in -- I only pay federal income tax on the interest.
Since my fixed-rate mortgage is at 2.75% (we refinanced during COVID), I am now profiting from having a mortgage due to the arbitrage situation of earning over 5% annually (approximately 3.75% after discounting for federal income tax). The spread between the after-tax rate of the Treasury bond interest I earn and the interest I pay on my debt is about 1%. Under these conditions, it makes no sense to pay off my mortgage early.
While no investing is risk-free, in my opinion Treasury bill and bonds are as close to risk-free as you can get. While most of my wealth management clients are still in the accumulation phase of working, earning income, and building wealth, others are retired or working part-time and living partially off the investment income I generate from their portfolios. To them, wealth preservation is more important than investing in the stock of the trendiest companies and potentially riding the roller coaster of equity investing. For both types of clients, Treasury bills play a role in their portfolios since they provide stability in the event of a stock market crash or correction.
CDs, high-yield savings accounts, and money market funds are alternatives to Treasury bills, but if you live in a state with an income tax, you will pay state income tax on the interest. With Treasury bills, you won't.
Interest rates fluctuate and it is unknown how long interest rates will stay this high. The 20-year Treasury bond is no longer paying interest over 5%, but many short-term Treasury bills are. To learn more, watch this 6-minute video on You Tube.
DISCLAIMER: This blog article should not be taken as personalized investment advice. Investing in Treasury bills and bonds may not fit your specific situation -- before investing in anything it is prudent to speak with a financial advisor who is familiar with your financial goals and risk tolerance.
To contact Laurie Itkin, visit www.TheOptionsLady.com.
Comentários