Current Thoughts on Investing – T-Bills, Bonds, and Bond Funds

Jun 4, 2024

Current Thoughts on Investing – T-Bills, Bonds, and Bond Funds

Treasury Bills Are Paying Fantastic Yields

Treasury “bills” (i.e., bonds with maturities of one year or less) are paying 5.1% - 5.3%. These are fantastic yields, particularly in tax-free retirement accounts and even after-tax brokerage accounts. Inflation continues to run too hot and the Fed is likely not lowering rates in the near future. These T-bill yields should continue to be available for the next few months. You can also take advantage of these low short-term fixed income yields with excess cash in your practice bank account. If you feel you “need” up to, say, $70,000, as a minimum to cover monthly payroll, and you have an additional $150,000 in that account earning 0%, then open a second high-yielding account with your bank, shift that $150,000 into it, and earn up to 4% - 5% on this cash. The accounts will be linked so you can move cash back into the operating account if you need to.

What About Longer-Dated Treasury and Corporate Bonds?

Longer term Treasuries (“notes” and “bonds”) are all yielding about 4.5% - 4.6%. We are not rewarded with higher returns for locking ourselves into longer dated maturities. Frankly, a seven or ten year bond yielding 4.6% doesn’t impress us. Yes, this is high compared to recent history, but it is not enough to entice us into buying. After subtracting out the taxes on the interest, we’re left with no real return. Bonds are subject to two forms of tax, a smaller tax that is visible, and a larger tax that is invisible. The visible tax is the income tax. All bonds other than tax-free municipals are subject to federal tax at our highest ordinary income rate, up to 37%. Figure that that consumes 1/3 of our return. The invisible tax of inflation is even more damaging. Inflation obviously isn’t a tax that’s been adopted by statute but it still comes from government through the expansion of the money supply. The more dollars there are competing for a limited supply of goods and services, the more those things will cost. And owning assets that are denominated in dollars (like bonds), means that their purchasing power will fall over time. When we subtract out the income tax and the inflation tax, our “real” return has fallen to zero.

This 0% real rate of return may still be acceptable to some, particularly retirees, who wish to convert part of a large and volatile stock portfolio into bonds that will at least maintain, if not grow, their values. But longer-term bonds yielding in the 4.5% to 5% range, to us, make little sense for an investor who is ten or more years from retirement. As a side note, Warren Buffett, chairman and CEO of Berkshire Hathaway, and by most accounts, the greatest investor of the last century, seemingly agrees. Berkshire’s own portfolio is invested almost entirely in a barbell approach, with the majority of its investments in equities but a massive cash hoard of $167 billion invested in short-term Treasury bills. Longer term bonds, at their current yields, are of little interest to Buffett.

If Treasury notes and bonds aren’t appealing, what about corporate bonds? Before buying corporates, you should understand the concept of the “spread,” the excess of the corporate bond’s yield over the yield of a Treasury bond that is maturing at around the same time. The Treasury will yield less because, unlike the corporate bond, it is default-risk free. The best time to buy corporates is when spreads are high. A high spread would be 1% or more on a single-A or double-A-rated corporate bond compared to the Treasury bond. Spreads go up when investors think the economy will soon fall into a recession. They get compressed when investors view the economy as sound. Currently, the spreads on five-year, high quality, AA-rated and A-rated corporate debt are very low, around 0.30% and 0.50% respectively, which makes them (to us at least) unappealing.

And Bond Funds?

When buying bonds, strive to buy individual bonds and hold them to maturity. Do not invest in bond funds. The biggest problem with bond funds (aside from the management fees that consume part of the returns and the opacity of some of the bond holdings) is that most bond funds have more in common with stocks funds. They have no maturities and rise and fall in value based on what is happening with interest rates. Bonds appeal to people for their safety, stability, and certainty. You get these by buying high quality (i.e., high-rated) bonds that are paying a positive real return and then holding them to maturity.

The only time we’d consider a bond fund is if we’re adopting a simple investing approach of allocating our portfolio between a small group of mutual funds, one of which could be a low-cost bond fund. One advantage of the bond fund is that it is easy to get in and out of as they trade like stocks on an exchange. Buying individual bonds is more difficult, but certainly not hard. Over the past decade the market for buying bonds has been greatly democratized to the point where anyone with a Fidelity, Charles Schwab, or similar account, can buy bonds at negligible markups directly from their websites.

How Can I Buy Bonds?

Learning how to buy individual bonds takes a little bit of time and effort, but it is worth it. We covered this in Segment 1 of our Advanced Investment Webinar last December, which is available on our website at If you want to own bonds but don’t want to select them yourself, then your alternatives are to buy a fund or pay an advisor to create a bond portfolio specific to your needs. We prefer the latter approach and often recommend Marilyn Cohen, President of Envision Capital Management and frequent Forbes magazine contributor. Her specialty is finding bonds that have the rare combination of safety and attractive yields.

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