5

According to the information provided by treasurydirect.gov, currently the rates for any Treasury bill ranging from 4-52 weeks are all above 4% (expressed yearly).

Looking at the 10 year/3month inversion spread, the graph is currently in the negative, meaning that the rates for short-term fixed income investment options are more favorable than long-term fixed income options. A negative inversion graph is reflected in the 4%+ rates for the most recent Treasury bills.

Therefore, I'm assuming 4%+ rate is currently good for Treasury bills.

More generally, I am wondering how can one determine at what percentages to draw the line between "poor", "average", and "good" investment rates, given that these rates fluctuate with the economic cycle?

1
  • The available rate on a Treasury Bill should be set against the investor's prediction of forward inflation.
    – S Spring
    Jan 21, 2023 at 14:17

1 Answer 1

3

You can't assume that due to inverted yield curve, the current yields for short-term investments are "good".

For example, ECB says that in Europe, 1-year long AAA-rated government bonds yield 2.016% and 10-year long AAA-rated bonds yield 1.880%.

So that must mean that 1-year long AAA-rated bonds have a good yield, right? Wrong!

History clearly shows that whenever inflation has been at a level of 2% (the target level), the average yield for short-term bonds in Europe has been at about 3.5% (real interest of 1.5%). However, in 2008-2009 something strange happened and we entered a period where inflation was below target of 2%, but interest rates were practically zero or negative. That period ended this year.

Because this year, core inflation is at about 5% (inflation excluding food and energy), the fair interest rate for today's environment is real interest of 1.5% and therefore nominal interest of 6.5%.

In United States, the situation is very similar: long-term historical short bond yields are about 3.8% whenever inflation is at target of 2% (source: https://www.multpl.com/1-year-treasury-rate excluding the outlier period 2008-2022), so today if core inflation is 6.3%, short bonds should yield 8.1% because long-term average real short bond yield is 1.8%.

So interest rates today are extraordinarily low. I wouldn't put any money into interest-bearing instruments, unless the money is for example a small emergency fund.

5
  • 1
    Agree with most of the observations, not necessarily with the conclusion. All the standard investing advice will recommend a mixture of stocks and bonds; the bonds won't produce as much income, but they buffer you against the times (like now) when the stock market is down, and extensive monte-carlo simulation suggests that this is important.
    – keshlam
    Dec 10, 2022 at 15:38
  • Well by buying government bonds at a time when rates are low, is a sure way to have both your bond portfolio and stock portfolio value decrease rapidly, at the same time, like we now observed. Bonds didn't help a single bit to maintain portfolio value. They will help in the future when interest rates will become normal again, though.
    – juhist
    Dec 10, 2022 at 18:33
  • Well ok, very short bonds could be useful to give a more stable portfolio, though. 10-year bonds, not so.
    – juhist
    Dec 10, 2022 at 18:34
  • Look up the mix of a typical "total bond market" index fund; that makes up 25.5% of my portfolio. Large cap 37%, small cap 6.5%, international 23%, REIT 6%. I AM NOT RECOMMENDING THIS MIXTURE; IT IS WHAT SUITS MY TIME HORIZONS AND MY RISK TOLERANCE AND MY RESOURCES AND MY GOALS AND MY INTEREST LEVEL, and you should be making decisions based upon your own needs with advice from folks who have the tools to evaluate the trade-offs and predict probability spreads.
    – keshlam
    Dec 10, 2022 at 18:45
  • @juhist if you’re holding actual bonds with the purpose of holding until maturity, then for you the bonds have maintained their value. (And this is why I think bond funds are not wise.)
    – RonJohn
    Jan 20, 2023 at 21:58

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .