Disadvantages of Investing in Treasury Bills
Many people like investing in Treasury bills because they are generally safe, when compared to other investments. Indeed, even with current economic troubles, Treasury bills are still backed by the most stable taxpayer base in the world. As a result, it is relatively easy to feel confident went investing in U.S. Treasuries, especially for those nearing retirement and looking for a safe source of income.
However, even with some of the advantages associated with investing in Treasury bonds, there are some disadvantages to be aware of. Investing in Treasury bonds might not always provide the best option for your particular situation.
Low Yield on Treasury Bills
One of the biggest disadvantages of investing in Treasury bills is the low yield. Because they are considered safe (even with the recent U.S. credit downgrade to AA), bonds offer a low yield. In many cases, especially in periods of high inflation, you might not even come out ahead. The nature of Treasury bills means that you will not get a very high yield. This means that, while T-bills can be solid for providing income once you’ve amassed a nest egg, they aren’t going to do a lot for you in terms of building that nest egg. They are better for capital preservation, and for a safety net.
What if the U.S. Government Defaults?
One of the disadvantages to U.S. Treasuries came out not too long ago during the debt ceiling debate. The fact that the U.S. could head into a technical default came into sharp focus. Would you just not get your money? Probably not. But it might be delayed, since when rich countries “default” on their debt, most of it is re-characterized and rolled over into longer maturities, making it harder to access your money on time.
However, the U.S. is unlikely to default anytime soon. The borrowing power of the U.S. has been expanded recently, and, of course, various government and quasi-government institutions can, for all intents and purposes, approve the creation of money to cover debts. (Although the resultant inflation could be a real nest egg killer.)
Bottom Line
In the end, many investors find that the advantages of having a safety net in the form of Treasury bonds is worth it. However, if you are looking for high yield, you will have to look elsewhere, since the biggest drawback to investing in Treasury bills is the rather low interest yield.
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I think it's interesting that S&P downgraded our credit rating from AAA to AA+ and the demand for our debt INCREASED. Talk about counter intuitive.
Rates on treasury bills are low, but I think people need to be careful here. It's tempting to chase 2% and 3% returns. However, we should evaluate whether the returns warrant the level of risk we're taking. For instance, if there's a 10% chance I'll lose 20% of my investment by the time I need it, you can keep your 3%.
With the low yield I won't be investing. If they ever have more competitive yields than I would consider investing in them.
Yeah Andy. Its not looking pretty for Tbills right now.
I never invested in T Biils, only because the yield is not so good. Although I am not fully aware of the dynamics of a T-biils, Miranda did a good job writing this.
I don't have much capital right now for stocks and I'm thinking of investing my money to mutual funds and treasury bills.Is this still worth pursuing?
I agree. There are many other higher yielding investments than treasury bills. I have recently been considering real estate as an alternative option for investing.
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