Five alternatives to 0% yield U.S. treasuries

by Xin Lu on 11 December 2008 10 comments

This week the 4 week T-bill rate was driven down to 0% and the demand for these treasuries was astounding.  It seems that investors are so pessimistic that they are willing to accept no yield for the safety of their principal. If you have been following the markets for the last few months it does  seem like  every other asset is falling.  So, where could we put our cash if we do not want  0% yield treasuries?

1. I-Bonds - If you believe in the safety of treasuries, then you should have the same faith in I-Bonds because they are also issued by the United States Government.The current fixed rate is 0.7%  and semi-annual inflation rate is 2.46% so the composite rate is 5.64% for at least six months. 

2. Certificates of deposit- Practically all banks are still offering certificates of deposit with yields higher than 0%.  The Fatwallet forums maintains a good list of the current rates at various institutions. 

3. Checking/savings account - Most checking accounts do not pay interest, but your money is free for use.  Many online and offline savings accounts are still paying decent yields above 2% and they are FDIC insured up to $250,000 per account.

4. Pay off debt - Instead of buying 0% treasuries, it would definitely be better to reduce any debt you have with any extra money you have. If you keep your money in an investment that pays nothing but your debt rises at a positive interest rate, then you will be able to pay less debt in the future with the money you have now.

5. Bury it - You may laugh at this one, but some people are dead serious about making their own treasure maps and burying their money.  This may not be a bad idea in case there is some true catastrophe and there is no way to reach your financial institutions, but then again, someone could find your stash and dig it up.  

I am sure that you can think of many other places to stash your cash amidst this very pessimistic investing season. Giving an interest free loan to the United States government may be seen as patriotic, but it is definitely not your only safe bet.
 

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Guest's picture

A CD and T-Bill are different animals. Most importantly, you can easily sell a t-bill you bought, there is no clearinghouse for CDs. This is why t-bills are so popular.

I like #4 and #5. I might also recommend buying Canadian and European currency. Or gold, but I don't dabble in such things, I'm a #3 guy myself.

Guest's picture
Johnny

Wow, people are putting money into 0% yield investments? I agree with weakonomist. It seems smarter to just put your money in an FDIC insured checking/savings account or just pay off debt. If you can stomach the thought of putting money into the financial turmoil of the current markets, you could do well (in a few years) by dollar cost averaging into some index funds.

Guest's picture
FrugalZen

Limit.

The Treasury dropped the amount of I-Bonds you could purchase in a year from $30,000 down to $5,000.

Since they are Tax-Deferred I guess the idea is to limit the amount of money you can shield from taxes.

The new administration is going to wallop us with new taxes and if you could defer a lot of them until a friendlier one got elected and repealed the tax increases it "Wouldn't Be Fair".

BIG Raspberry...

~ R

Guest's picture
Kelja

Xin,

You forgot one: Gold. The metal itself is up for the year. Yes the mining stocks have been crushed (they're coming back), but gold itself is up.

Bonds don't pay anything, stocks are being hammered, Real Estate is still headed down, your bank isn't safe, all commodities are off their highs, but gold is up. I don't think anything else is up.

You can invest in gold in small ways. Having the actual metal in your possession is the safest - in the form of coins. You could buy an ETF linked to the actual metal - CEF, a canadian fund is the safest.

One thing you can say about gold is that it will never go to zero. I'm surprised with your heritage, you omitted this investment.

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Kelja

the above is absolutely not investment advice!

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Guest

"Wow, people are putting money into 0% yield investments? I agree with weakonomist. It seems smarter to just put your money in an FDIC insured checking/savings account or just pay off debt."

The people that you refer to are not actually people but large institutions and money managers. The FDIC only insures up to 250k. The money going into T-Bills is much larger.

Because the large players control rates and prices the question becomes, where do you put large amounts of money with little or no risk. According to the rate action, the T-Bill seems to be the answer.

Guest's picture
Jim

Above someone suggested putting money into gold. Gold prices have fluctuated up to 30% in the past 12 months alone and today gold is 15% below its peak for 2008. Gold has not been a good long term investment over the past 3 decades. In 1980 the price of gold hit $850. Today gold is at $820. I had the impression that the point of this article was more to list SAFE investments that you can depend on in todays chaotic financial state.

Guest's picture
Bill M

What about CDARS, CDs that spread amongst among banks that can be up to 30 million dollars per person. I think that would be the smarter thing to do then getting 0%

Guest's picture
Kelja

@Jim

Gold will wind up being one of the ONLY investments that will finish the year above where it started. Gold should be looked at as insurance for the common man. It will never go to zero, unlike stocks and bonds. IF the financial meltdown continues, and I believe it will, you need insurance.

Guest's picture
Guest

Gold is not a risk free investment. You're logic is the same as the people who believed that stocks only go up in the 90's. Just because something happens most of the time or has been happening a lot recently does not make it risk free. I suggest you read the book Fooled by Randomness. Also, read up on the concept of expected return. The probability of an event happening is only half the story. You also have to take into account your potential gain/loss in accordance with that probability.

Also there are many possible reasons for high interest in the auction. Almost all of the volume in auctions are generated by banks or other large financial companies through a primary dealer. Many of these institutions have to adhere to strict risk profiles which may require the bond even if it yields 0% or negative. It may seem strange that anyone would be willing to "invest" in an instrument that loses money. However, you have to consider that banks have a variety of operations. If you can generate a 10% yield through a combination of activities(trading cash bonds, swaps, swap futures, etc) and lose 1% on buying a bond to hedge out part of your risk, then it's still worth it in the end.

As for individuals, I would recommend TIPS over the I bonds. One of the big problems with I bonds is that they cannot be sold in the secondary market. Also, there is only one maturity: 30 years. This means that you're basically locking up your principle for 30 years unless you want to pay the penalties previously mentioned. TIPS on the other hand can and are often traded in secondary markets. Granted, these are not the most liquid markets and crossing bid/ask combined with commissions can add up to be a bit, but in most cases it will still be less than the penalties of the I bond