The Revenge Of The Treasuries

I started investing in the year 2001. At that time I really never understood fully what a bond is and what purpose it served in this whole investment world. But then again, I didn't really know what equity really meant beyond the price being quoted for a stock in the stock market. But that never really stopped me from investing in stocks based on the vagaries of price action. I jumped headlong into the darlings of the bygone internet boom. The only saving grace there was that I had jumped in post the worst of the market melt down and so over the next few years, the amount of money I lost was much more manageable given I had started post the apocalypse for those names. In all those years, the one thing that I could never figure out was how to go about buying a bond or treasury issue. 2007 came and interest rates were they are roughly today but it never occurred to me to ever invest in them. Bonds are traded over-the-counter and so brokers make it rather opaque as to how to buy/sell them and some don't even offer them. So in the famous words in the movie "American President" - "They don't eat sand because the want to, they eat it because they don't know the difference" - I continued on with a pure equity portfolio. 2008 came and rest as they say is history. 

2023 is shaping up to be a different year from all the other years I have been investing when it comes to alternatives to stock investing. The 6 month T-Bill is 5+% and the 2 year Treasury is 4.9%. The 5 year is at 4.25 and the 10 year is kissing 4%. For those keeping track, a 5% return compounded is a 62% return in 10 years. Not earth shattering my any means, but definitely better than the 0.025% return I have made on cash in the past 20 years investing. This is nothing to say anything about going up the risk curve into Agency, Municipal and corporate bonds of varied bond ratings from investment grade to junk bonds.

So while we wait for whatever it is that the equity market has been trying to do for the past two months of this year and look for equity investment opportunities, there is a very nice bond market out there that is ripe for parking money. And if you are not especially greedy about the returns and believe that inflation will eventually settle somewhere between 2-4% in the short to medium term and eventually be 1-2%, bonds look like a nice alternative to balance out the portfolio that has been all equity thus far. 

The classic ladder works out. Nothing fancy. In September when there was all the hoolahoo about the fed tightening too fast, I wet my toes into 5-year treasuries at 4.25-4.45%. But with this second coming, I am thinking of a better spread for the portfolio. Starting with a 20% target on the overall investment portfolio, the plan is to buy a ladder of Treasuries starting with the 2 year going up the ladder with 3, 5, 7, 10 year. I am not sure if I will get a chance to roll them up as they expire given I am not sure if the interest rates will continue to be attractive enough, but lets start the ladder and see where it takes us 2 years from now. These are all planned to be held to maturity and I do not plan to trade them. So I mostly buy full term issues.

The other major experiment is going to be taking the cash portion of the investment portfolio and invest it in 3-6 month T-bills . This is something that a lot of investors with a lot of cash balance do rather than keeping it as cash or in a money market account. I am not sure how well it will work for me or if it is really that easy to roll them every 3-6 months, but given the 5+% rate it is worth a shot. 

So why not corporate bonds for now. Because I still think there is a credit crunch in the offing. With enough strain on the earnings due to the slowing economy, inflation and interest rate hikes, some of this corporate debt is going to be challenged. The current spreads on Treasuries vs Investment grade vs Junk doesn't seem to reflect the benefit of taking that additional risk. Besides I don't think I have a good way of going up that curve intelligently. Obviously, if tomorrow the spread on MSFT or AAPL or GOOGL bonds start showing significant enough differential it might be a no brainer to reach for that extra yield given the entrenched position and cash flow these mega-caps have.

All this sounds well and good. The debt ceiling debate and a threat to default and/or downgrade is a black swan that might strain all these calculations, but for now I think I am going to take that chance and dabble in Treasures, if not for anything else to understand its place in a portfolio.