Better Than The Bank, But Just Barely

We recently received a question from a reader asking— given all the volatility in the market, what do we think of US government bonds right now as an asset class?

First, it’s absolutely true that there has been a sudden surge in uncertainty.

In some respects, it’s astonishing how much of this has emerged just over the last 6–8 weeks. Consumer sentiment, business sentiment, and investor confidence have all cratered since mid-February.

This is a very difficult environment in which to do business.

Companies have no idea what the world is going to look like, literally two days from now. That’s crazy.

US manufacturers, who almost certainly have to import at least a portion of their raw materials and supplies, might find they have to pay 20% more. This will increase their costs of production… which ultimately means higher prices for consumers.

Companies outside the US, on the other had, could easily see substantial declines in sales as a result of tariffs.

I’m personally involved in a number of different businesses, and virtually all of which are rethinking their plans. Some have suspended dividends in light of so much uncertainty, which is a prudent step.

But it all seems so bizarre and unnecessary; this isn’t what Americans voted for when they went to the polls in November.

So a desire to hold a “safe asset” amid this chaos certainly makes a lot of sense. And for decades , US government bonds have been the safest asset in the world.

Is that still the case? No chance.

Just consider that the US government has $36+ trillion in debt, runs multi-trillion-dollar deficits every year, and pays an annual interest bill of $1.1 trillion. That number is rising very quickly and already exceeds national defense spending.

Yes, it’s true that this situation could get better. It’s possible for the government to escape this fiscal black hole and eventually balance the budget and grows out of debt.

But that’s far from a guaranteed outcome.

So anyone who buys a 30-year bond (which yields just 4.6%) is taking on a significant amount of risk that the situation continues to deteriorate over the next three decades, and perhaps reaches a major crisis point well before the bond matures.

To take on all that risk for a measly 4.6% seems crazy. Inflation could easily exceed 4.6% in the coming years, essentially wiping out the entire investment return.

The 10-year Treasury note doesn’t strike me as a particularly better outcome. It’s still ten years of risk, relative to a return of just 4.2%.

When the entity you’re loaning money to is $36 trillion in debt, any extended duration represents a significant level of risk.

Frankly, even some of the shorter-term Treasury securities seem a little bit risky, given that the debt ceiling might be breached this summer. If that happens, the government would at least temporarily default on its bondholders… so even a six-month T-Bill looks a bit risky.

At this point, I think the only one worth owning is the ultra-short-term 28-day T-Bill; you only have to take four weeks of risk and can re-assess every month.

On an annualized basis, the 28-day T-Bill yields about 4.3%, which is roughly the same as a 10-year Treasury. So basically it’s the same return, but without having to take an entire decade’s worth of duration risk.

In many ways, a 28 T-Bill is a bit like having a one-month certificate of deposit at your bank. But the T-Bill is better since most banks still offer next to nothing to their depositors.

The other thing, quite bizarrely, is that buying government bonds is actually a better experience than dealing with a bank.

You can buy a 28-day T-Bill—or any other US Treasury for that matter—by opening an account at TreasuryDirect.

I’ve written about this multiple times over the years, and the interesting thing is that opening an account at TreasuryDirect is so much easier than opening an account at a bank.

When you go into a bank, you have to suffer all sorts of indignities—violations of your privacy, mountains of paperwork, stacks of contracts which no normal human can even understand.

And of course, the banks have to follow endless anti-money laundering, fraud, and tax regulations to make sure that you’re not a narco-terrorist or related to Vladimir Putin.

The Treasury Department, on the other hand, does no such checks and follows no such regulations.

This makes the process of opening up an account at Treasury Direct so much easier than opening an account at a bank.

To be fair, the user experience of the TreasuryDirect website leaves a lot to be desired. But we have to set our expectations low given that we’re dealing with a government.

Aside from that, it makes a lot of sense to hold 28-day T-Bills because it affords you the opportunity to reassess once a month.

So for now, I think the shortest-term Treasuries are a good option—and frankly a better one than banks. But just barely.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/better-than-the-bank-but-just-barely-152401/