I made my first killing in the bond market at the ripe old age of 30…
I bought a corporate bond for a company called Digital Realty Trust. At the time, it was trading for about 80 cents on the dollar. Thanks to the drop in price, my yield was 7%.
I had run the numbers and knew the company wasn’t going bankrupt. It was in a strong growth market – data centers – that had hit a short-term speedbump. I knew it was mispriced… so I bought a stake.
Within a year, the bond was back at its par value. I had made 25% in about a year… a fantastic return for a bond investment.
If only all bond investments were that profitable. If you invest at the right time and get a reasonable entry price, you can make years of returns in just a few months.
But the bond market is a complex beast… And for years, it’s been one to avoid. Until last year, we warned you to avoid them like the plague.
Why?
The nearly non-existent yields offered no real inflation-adjusted return… unless you were willing to buy bonds with a high risk of default (i.e. junk bonds).
For years, most bonds haven’t made sense for everyday investors to own. Yes, the certainty of getting your principal back at maturity sounds great. Especially with the volatility we’ve seen in the stock market… and another Crypto Winter.
But now, rising interest rates are sinking bond prices. And as I wrote in January, that means now’s an opportune time to dip into the bond market.
In today’s essay, I’ll tell you about one area of the bond market that offers both safety and the potential to generate up to 40x more yield than simply parking your cash in the bank.
So if you need a safe place to generate income without taking any risks, this may be the most important essay you read all year.
Why You Need to Rethink Your Safe Cash Holdings
If you have money in a savings or checking account, chances are you’re earning a pittance… if anything.
Right now, a savings account at JPMorgan Chase yields about 0.01%. For every $1,000, you’re making a measly $1 annually. That’s about 8 cents per month.
Wells Fargo will give you 10x the return… with a whopping 0.1% interest rate. That turns every $1,000 in savings into $10.
Either way, it’s chump change – especially for the risk. As we’ve seen during the recent banking crisis, there’s a chance your deposits could be temporarily locked or unavailable if regulators shut down a bank.
Fortunately, there’s a virtually risk-free asset offering yields of 4% right now. That’s between 4x and 40x what you can make by simply leaving cash in the bank.
And by no-risk… I do mean no-risk.
That’s because I’m talking about U.S. Treasury bills (T-bills). They’re considered the safest asset in the world given the U.S. government’s ability to tax (or print money) to buy back its bonds at face value.
In other words, they’re backed by the full faith and credit of the U.S. government.
Currently, short-term bonds with durations between 30 to 90 days are paying close to 4% annually. That’s enough to turn $1,000 into $1,040 in a year.
Of course, that doesn’t sound like much. But it’s up to 40x more yield than simply keeping your money in a bank account – and safer, too.
As long as you hold the bonds to maturity, the U.S. government guarantees you’ll get your entire principal back.
I’d take that offer any time.
A Low-Risk Strategy to Beat the Bank
Over the past year, interest rates have risen so fast that you can now earn a decent yield, even on short-term Treasury bills. And you don’t need to take an insane amount of risk.
So it’s no surprise that we like short-term bills at the Daily. The yields are much better than a savings account… and at most, you’ll only need to wait just a few weeks to get your money back.
You could even “ladder” your bond buying. That’s simply the process of buying bonds with different maturity dates to reduce your risk and take advantage of different yields.
As one bond matures, it’s then reinvested into the longest-dated bond you’re willing to buy.
(In the April issue of our flagship The Palm Beach Letter, Daily editor Teeka Tiwari and I show you exactly how to ladder bonds. Subscribers can read the issue right here.)
Yes, I know the idea of owning government bonds doesn’t sound as exciting as investing in a red-hot tech stock or explosive crypto play.
But with interest rates where they are now, and with the banking system in crisis, you need to focus on safety first.
Plus, with T-bills, you won’t starve for income like you would keeping cash in the bank.
By sticking to the short-end of the yield curve, you’re avoiding the long-term pricing risk of owning bonds… while also getting some of the highest rates available on risk-free T-bills in over a decade.
That’s a win-win.
Of course, when the Federal Reserve is done raising interest rates, you’ll want to consider long-duration bonds. They’re likely to have the biggest price move higher when interest rates decline.
(Bond prices move inversely to interest rates. So when rates go down, bond prices go up.)
We’re not there yet. So be patient. Until then, you can collect up to 40x yield on your money with T-bills compared to cash in the bank.
Good investing,
Regards,
Andrew Packer
Analyst, Palm Beach Daily
P.S. If you’re looking for another way to generate income, Teeka recommends a tiny subsector of crypto that will benefit from a coming “buying panic.”
Unlike most cryptocurrencies, these tokens are programmed to pay you monthly income on top of capital gains. And they’re set to benefit from a surge of activity coming to one of crypto’s largest networks as early as next week.
During his special event, he explained what this catalyst is and what types of tokens will benefit from it. For a limited time, you can stream it right here.