T-bills: shorter vs longer maturity strategies

[relaxbuddy]

I’m new to fixed income and conservative investing in general. Lately been weighin on different t-bill ladder strategies. The goal is to employ my capital in a safe heaven and wait out this current ridiculous pump on a thin air – then do some decent shopping in 24’.

I have to stay as flexible/liquid as possible since: a) the further down the line, the more likely are good deals to appear on the market; b) I’m in the Eurozone so will flip EUR once USD pumps considerably during the potential crash; c) short-term yields likely to grow further to 6-8% since no cuts (provided there’s no black swan) till 24’

Correct me if I’m wrong but very short mat. bills (2 week-2 month) seem to cater much better for these needs as opposed to longer ones? Fees are negligible ($5 for a trade on IB), so no problem rolling those over even weekly. They keep you liquid at virtually all times. Even in the event of a circuit breaker (and a subsequent rate cut/yield fall), chances are you’ll sell 2M above water way easier than 6M way before maturity, right? And then will be able to lock-in still high yield for longer once it’s already started declining.

On the other hand, am I right to assume I'll usually be able to sell even longer mat. bills for a profit way before maturity? Eg, I buy 6M, the yields keep on rising moderately and I want to sell in 1-2 months (to lock in higher yields or invest elsewhere). Is it likely I’ll I be above water by then or is it likely a moderate yield growth will have pushed my bills into a negative territory?

 

[resjudicata]

@relaxbuddy There’s a lot going on in your post, so going to try spell out a few points which might help.

Firstly, presumably as a retail investor in Europe, I wouldn’t park idle cash in USD treasuries. The reason for this is, in a perfect world, there’s a process called interest rate parity. Essentially this means that the FX rate will move in the direction required over time in order to bring the yield of two comparable bonds to be the same. So it wouldn’t make a difference which currency you invest in, but what it does mean is that your essentially going long USD / short EUR as part of your position, so any of part of the return that deviates from the expected yield under parity is because you were taking a stance that you thought one currency would put perform the other. I personally don’t take on FX risk buying bonds because I want certainty over the return.

If your parking cash to have ready to invest, you want to be at the very short end of curve. 0-1 year maturities max. Focus on the duration of the bond / bond fund. For idle cash in this specific scenario, the shorter the better. Duration is a good measure of how your positions will react to interest rate movements - if you’ve a duration of 0.5 years and rates go up 1%, you’d expect your holding to fall by 0.5%, but if you then purchased the position after the price has declined, the YTM would be higher.

I think you need to decide are you trying to just earn any sort of return while you wait for a pull bag, or do you want a longer term allocation to debt instruments. I’m personally doing what your doing but I want my principal ready to go at a seconds notice, so I’m in an overnight swaps ETF. This has virtually no interest rate risk and you earn the ECB overnight rate. If rates are cut you won’t make the gains longer duration bonds will, but by then expect you’ll be deploying your capital.

 

[relaxbuddy]

@resjudicata Thanks for a detailed answer. Regarding the first point, I'm a fellow European, but have my capital in USD for some time now. Buying US debt instruments/fixed income is in line with my forex outlook. DXY will outperform EUR medium term since a) it's down significantly in the last 9 months; b) it's the ultimate safe heaven and that coincides with my fully bearish outlook for the economy. So not even longer ECB rate hikes should outdoo these factors.

Yes, I'm on the same page regarding that having ready capital is a priority. Not buying shit until SPX is at least under 350, so don't foresee needing capital in the next few months. So will proly buy 2-4M T-bills and after that will start making more frequent roll-overs, maybe even bi-weekly since it doesn't cost a lot.

The real question will be when I'll feel like we're approaching the peak yield - for how long to lock in the high rate then. Tricky since it should also be signaling the opportunity window for shopping will start opening soon after that. I guess will depend on the EUR/USD. Could see 6M bills EOY/start 24' making sense - once they start cutting, they'll be profitable way before the maturity

 

[resjudicata]

@relaxbuddy If you purposely want to hold dollars then what you’re doing is fine. Was just making sure the underlying mechanics was understood. Considering your European based like me (i.e EUR is your local currency), I’d focus less on the DXY and more on EUR/USD in that case, because a little less than half of the DXY is made up of currencies that are irrelevant for your concerns.

 

[relaxbuddy]

@resjudicata Trying to buy rn and running into some issues. Maybe you're using IB and could chime in?

https://www.reddit.com/r/interactivebrokers/comments/14n6uvr

 

[jrchristian]

@relaxbuddy Not an expert at all, just another fixed income newb, but seems counterintuitive to me. You expect rising yields & market turmoil and want to park cash in wait to exploit it (in USD, if I understood correctly). Why bills (which would fall when yields rise)? For these expectations & strategy, wouldn't it make sense to put the cash in a money market mutual fund (some are comission-free, at least with my broker, IBKR) or an ETF like Lyxor Smart Overnight Return (available for EUR, GBP, USD at corresponding rates; make sure to differentiate listing currency vs fund currency, e.g. you can buy the USD fund in EUR)?

 

[relaxbuddy]

@jrchristian Was thinking about MMMFs, seem to make sense, just haven't started diving into them.

But again, very short maturity T-bills seem to be immune to declining since you can wait 2-4 weeks 99% of the time regardless of the macro backdrop

 

[relaxbuddy]

also money market mutual funds sound like a good alternative. Afaik it's 0.5% lower yield than t-bills, same level of security but better liquidity - can sell at any time not losing the yield you've already accrued

 

[buzzy204]

@relaxbuddy I would be interested in this. Perhaps somebody with experience can chime in?

 

[lucianocardoso]

@relaxbuddy Buying very short duration bonds protects you from rising interest risk.

But other than the fact, that timing the market is impossible -in case you want to buy longer duration bonds, when their yields peak- you expose yourself to some serious currency risk

 

[relaxbuddy]

@lucianocardoso yeah, thought about that. Sure, won't be perfect timing, but a man has to plan

So it'd depend on where Eur/USD is at the time of a potential yield peak. If DXY is still shitting its pant like rn (which isn't likely, since it's the ultimate safeheaven), I'd be comfortable locking myself in for longer. Still not longer than 6-9 months tho

 

[lucianocardoso]

@relaxbuddy Sounds like a foolproof plan ..

 

[relaxbuddy]

@lucianocardoso I'm doing fine mate