T-bills yield is the lower bound for the return?

Question

When I look at the US treasury rates I see a number say 4%. That means if I buy 12m note today I will get 4% interest in 12M. This will be my return. What if the rates went down and as a result the bond I am holding becomes more expensive than face, then I can sell it and earn even more? Yet if rates rally I simply keep the bond and get the face. Thus, I am earning at least 4% and possibly more?

Answer 1

You are guaranteed 4% if you hold the bill to maturity. If rates go down and your bill is more valuable, then yes you can sell it for more than what you paid for it, but then what do you do with the money you got? If you buy another bill, it will earn less interest than the one you just sold, so it would roughly be a wash.

The only way that you would earn "more" is if you sold the bill for a premium when yields went down, did not reinvest it, and bought a new bill for cheaper if yields go up. But it it not guaranteed that yields would go up after you sold, so it is no longer guaranteed income - you're essentially trying to time the bond market.