Should You T-Bill and Chill? (2024)

Cash investors haven’t had it this good in years. After a long period of near-zero yields, yields on the three-month Treasury bill have been as high as 5.5% so far in 2023—their highest level since December 2000. That’s not only decent in absolute terms but also well ahead of inflation, which has been running at about 3.2% year over year based on the most recent data reported on Nov. 14, 2023.

Current cash yields are also attractive because of the unusual state of the yield curve. Longer-term bonds typically offer more generous yields to compensate investors for the time-based risk of locking up their money for a longer period. Over the past year or so, the yield curve has been inverted, which means there’s no yield incentive for investors to venture out into longer bond maturities. Investors can earn better yields on the short end of the curve without courting any interest-rate risk.

The unusually generous yields on cash have led many investors to ask: If you can earn a positive real return on Treasury bills and other short-term instruments without taking any risk (aka the “T-bill and chill” strategy), why not? This line of reasoning has led to a flood of cash in money market funds, totaling nearly $900 billion for the 12 months through Oct. 31, 2023. But are investors making the right decision by scooping up these funds? In this article, I’ll look at the pros and cons of keeping money in cash.

Arguments in Favor of T-Bill and Chill

An environment where interest rates continue to remain higher for longer—as many economists have been expecting for the past few months—would be favorable for this strategy. Since the yield curve first started inverting in November 2022, Treasury bills have outperformed longer-duration bonds by a healthy margin, as shown in the table below. Cash returns have fallen behind those on stocks as the market has staged a recovery, though.

A Partial Win for T-Bill and Chill

Should You T-Bill and Chill? (1)

Continued moderation in inflation would also be positive. One of the main reasons for investing is to preserve purchasing power over time, and a more temperate inflation rate makes it easier to do that.

The Potential Downside

However, there are a few other things to consider.

Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.

Inflation Risk: In addition, there’s no guarantee that cash yields will remain ahead of inflation. There’s often an opportunity cost for holding cash, and when cash does yield more than inflation, the gap tends to be relatively small. On average, cash edged out inflation by an annualized 0.64% over all the rolling 36-month periods from 1954 through Oct. 31, 2023. In other words, cash might stay ahead of inflation over the long term but not by a large amount.

Reinvestment Risk: Any investment in short-term securities involves reinvestment risk. For example, if you bought a three-month Treasury bill with a yield of 5.5%, you’d benefit from that annualized yield until the maturity date. But if interest rates drop to 4.0%, you’d be reinvesting at a lower rate. Market interest rates can quickly reverse course at times, which amplifies the impact of reinvestment risk. For example, yields on three-month Treasury bills dropped from about 5.0% in February 2007 to less than 1.3% in March 2008. Investors holding T-bills during that period would have had to reinvest at lower and lower rates.

Opportunity Cost: The biggest issue, though, is that investing in cash doesn’t really build long-term wealth. That’s true even during periods when T-bills appear to offer attractive yields. To quantify this, I looked at subsequent returns (starting in 1982) over 12-month, three-year, five-year, and 10-year periods starting with months when Treasury bills looked attractive based on either a positive spread versus 10-year Treasuries (the inverted yield curve mentioned above) or a positive spread versus year-over-year inflation.

On the equity side, the most convincing results were for subsequent periods when T-bills offered a positive yield spread compared with 10-year Treasuries. Because an inverted yield curve often portends a recession, T-bills had fairly decent odds of outperforming stocks over the following one-, three-, and five-year periods. For long-term investors, though, the odds of success were much lower. On average, annualized returns for T-bills lagged stocks by about 5 percentage points over the 10-year period following a month with an inverted yield curve.

Subsequent Returns Following Positive Yield-Curve Spread (T-Bills vs. Stocks)

Should You T-Bill and Chill? (2)

A positive inflation spread offered much lower odds for beating stocks. As shown in the table below, cash has historically lagged stocks over most of the subsequent periods based on months when T-bills offered a positive yield compared with inflation, and by a fairly wide margin.

Subsequent Returns Following Positive Inflation Spread (T-Bills vs. Stocks)

Should You T-Bill and Chill? (3)

Taking refuge in cash within a portfolio’s bond allocation also typically involves an opportunity cost.

The odds of T-bills outperforming intermediate-term Treasuries following a positive yield-curve spread were relatively low, especially over longer periods. And investors holding cash gave up at least 3.5 percentage points in annualized returns, on average, over each of the four periods.

Subsequent Returns Following Positive Yield-Curve Spread (T-Bills vs. Intermediate Treasuries)

Should You T-Bill and Chill? (4)

The odds were worse for periods following a positive inflation spread, as shown in the table below.

Subsequent Returns Following Positive Inflation Spread (T-Bills vs. Intermediate Treasuries)

Should You T-Bill and Chill? (5)

The success rate of cash compared with long-term Treasuries was similarly poor. T-bills outperformed long-term Treasuries over roughly one fifth of the subsequent 12-month and three-year periods, but none of the five- and 10-year periods.

Subsequent Returns Following Positive Yield-Curve Spread (T-Bills vs. Long-Term Treasuries)

Should You T-Bill and Chill? (6)

That was also true for periods following a positive inflation spread. T-bills outperformed long-term Treasuries in close to one third of the subsequent 12-month periods but had low to zero odds of success over longer periods.

Subsequent Returns Following Positive Inflation Spread (T-Bills vs. Long-Term Treasuries)

Should You T-Bill and Chill? (7)

Conclusion

In the end, the fact that T-bills don’t typically produce strong long-term returns—even at times when they offer relatively attractive yields—probably seems like an obvious point. As safe assets, they’re not expected to generate strong returns. (My colleague Adam Fleck came to a similar conclusion in a recent article.) The “T-bill and chill” strategy might pay off over some shorter-term periods (as it has over the past 12 months), but it’s not a reliable way to build long-term wealth.

The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.

Should You T-Bill and Chill? (2024)

FAQs

Should you T-Bill and chill? ›

The “T-bill and chill” strategy might pay off over some shorter-term periods (as it has over the past 12 months), but it's not a reliable way to build long-term wealth.

What is the T-Bill and chill strategy? ›

That was the 1981 version of our newly minted “T-Bill & Chill” social meme, which suggests just putting your money in Treasury Bills, collecting an attractive fixed rate of interest, and forgetting about it.

Is there a downside to T-bills? ›

T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market. T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.

Are T-bills still a good investment today? ›

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

Are 3 month T-bills a good investment? ›

Right now, the 3-month Treasury bill rate is 5.24% while the 30-year Treasury rate is 3.93%. So, if you're looking for a risk-free way to earn interest on your cash over a short period of time, investing in a T-bill could be a good choice.

What is the Boglehead strategy? ›

Bogleheads create a good plan, avoiding attempts to time the market, and then stick with it ("stay the course"). This consistently produces good outcomes over the long term.

Why does Warren Buffett buy T-bills? ›

Buffett reportedly prefers T-bills to other options because he never wants to worry about whether or not Berkshire's pile of cash is safely invested. Meanwhile, yields have jumped so much in the past two years that Berkshire is actually earning a pretty penny on this cash hoard.

What do 6 month T-bills pay? ›

Basic Info. 6 Month Treasury Bill Rate is at 5.16%, compared to 5.17% the previous market day and 4.87% last year. This is higher than the long term average of 4.49%. The 6 Month Treasury Bill Rate is the yield received for investing in a US government issued treasury bill that has a maturity of 6 months.

Can I sell my T bill early? ›

You can hold Treasury bills until they mature or sell them before they mature.

Can Treasury bills lose money? ›

Like Treasury bonds and notes, T-bills have no default risk since they're backed by the U.S. government.

How much does a $1000 T bill cost? ›

To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.

Is it better to buy Treasuries or CDs? ›

Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.

Why people don t invest in Treasury bill? ›

The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.

What happens when T Bill matures? ›

When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

What is a better investment than T-bills? ›

Treasury bonds—also called T-bonds—are long-term debt obligations that mature in terms of 20 or 30 years. They're essentially the opposite of T-bills as they're the longest-term and typically the highest-yielding among T-bills, T-bonds, and Treasury notes.

What is the yield on a 52 week treasury bill? ›

BondsYieldDay
US 52W5.160.016%
US 2Y4.940.004%
US 3Y4.790.019%
US 5Y4.660.029%
11 more rows

What is the current 12 month T-Bill rate? ›

1 Year Treasury Rate is at 5.17%, compared to 5.18% the previous market day and 4.77% last year. This is higher than the long term average of 2.95%.

Are Treasury bills taxable? ›

Key Takeaways

Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT.

What is the 4 week T-Bill rate? ›

4 Week Treasury Bill Rate is at 5.28%, compared to 5.28% the previous market day and 3.29% last year. This is higher than the long term average of 1.41%. The 4 Week Treasury Bill Rate is the yield received for investing in a US government issued treasury bill that has a maturity of 4 weeks.

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