One of the typical reasons mentioned to not pre-pay a mortgage is that the interest is tax deductible and therefore the effective rate on the mortgage is much lower. However, this argument doesn't seem to make sense if the mortgage rate and treasury rate are equal.
Suppose I have a fixed-rate mortgage at 3% interest and the duration matches a 10-year treasury which also pays exactly 3%. Further assume that the federal income tax rate is 20% and contributions to all tax advantaged investment plans have been maxed out.
If I have $1000, after-tax, to invest then I can either pay down the mortgage or buy a treasury.
If I pay down the mortgage then I have saved $30 in interest, but I would have deducted .2*30 from federal income tax so I have actually saved $24. In other words, I'll have $24 extra dollars in my pocket after a year.
If I buy a treasury then I get $30 of interest, but I have to pay the tax-man his 20%. Therefore, I am left with $24 after April 15th.
My question is: other than "liquidity", is there any benefits to buying a treasury over paying down a mortgage with after-tax money when the interest rates are similar?
Thank you in advance for your consideration and response.