Until the last two weeks most of us recognized that the U.S. treasury market was generally the better place to store funds, especially on a term basis, vs. the banks which were dragging their heels in raising rates for comparable maturities. We also have noticed that the last week changed that dynamic to an unprecedented degree. While this would likely only be of interest to those that have larger sums involved, live in non-income tax states, and don’t mind a bit of complexity in their daily lives, there is a golden opportunity available as a result….
On Thursday and Friday I liquidated multiple shorter term treasury positions acquired as recently as the prior week when rates were near and above 5%. I was able to liquidate those at yields approaching the mid 4’s and reinvest in comparable maturity CDs back in the low 5’s. I’m not referring to tax treatment here, but essentially I have a capital gain on the treasury position (as the prices moved in my favor versus the original amortization expectation), locked that in, then reinvested the proceeds at something approaching what my original return was supposed to be when I bought the treasuries in the first place. In simpler terms, from a valuation perspective the two asset classes are roughly comparable and should yield similar returns for similar duration. To the extent one becomes mis-priced relative to the other you buy the less expensive one. But now that they have switched places there is an additional opportunity to enhance returns by selling the expensive one previously purchased and replacing it by buying the cheap one. Fortunately treasury transaction costs are minimal at most discount brokers (just the bid/ask spread), and the CDs were plentiful in maturity selection and available as new issues. Just a PSA.