Investing: How I really screwed up playing the interest rate game

·5 min read

If you want an example of how someone can get carried away by what seem to be high interest rates, you don’t need to look at huge financial failures like Silicon Valley Bank, R.I.P.

Instead, you can look at me.

After watching my cash reserves earn almost no interest for years, I got so carried away last May when yields on one-year Treasury bills hit 2% that I bought a batch of one-year bills at the Treasury’s May 19 debt auction.

Oops. The Federal Reserve kept pushing rates higher and higher. And higher. Far more quickly than I’d expected, despite my 50-plus years of covering financial markets.

As things turn out, I’d have made considerably more interest income—about 50% more, according to money market fund maven Pete Crane of Crane Data—had I left the T-bill purchase money in my Vanguard Federal Money Market Fund account. (I’m using Vanguard in this article because that’s where much of my wife’s and my money is invested.)

U.S. Treasury Secretary Janet Yellen takes questions on the Biden administration's plans, following the collapse of three U.S. lenders including Silicon Valley Bank and Signature Bank, as she testifies before a Senate Finance Committee hearing on U.S. President Joe Biden's proposed budget request for fiscal year 2024, on Capitol Hill in Washington, U.S., March 16, 2023. REUTERS/Mary F. Calvert
U.S. Treasury Secretary Janet Yellen had a lot to say to Congress about the collapse of Silicon Valley Bank. But what about our columnist Allan Sloan's too early move into 1-year T-bills? REUTERS/Mary F. Calvert

Let me take you through the numbers, which I’ve rounded a bit to keep things relatively simple.

If you’d taken part in the Treasury’s debt auction last May 19, as I did, you’d have paid $9,788 for a T-bill that the Treasury will redeem for $10,000 this coming May 18.

Do the arithmetic by dividing $10,000 by the purchase price, and you see that my yield on that one-year T-bill was 2.17%.

At the time, Vanguard’s Federal money fund was yielding less than 1%, so earning 2%-plus was very attractive. However, the yield on the money fund began rising rapidly as the Fed kept jacking up rates. When last I looked, the seven-day yield on the fund was 4.72%. However, the T-bill’s yield to maturity stayed at 2.17% because T-bills are a so-called “fixed income” investment.

At my request, Pete Crane estimated what he thinks the Vanguard money fund will have yielded for the year that ends this coming May 18. His estimate: 3.12%. A spokesman for Vanguard, who did his estimate a bit differently, came up with a similar number: 3.26%.

Either way, it’s about 50% more than I’ll have earned on my T-bills.

Oh, well.

In my own defense, I bought one-year T-bills rather than longer-dated securities like 10-year Treasury notes because I figured that if I restricted myself to buying one-year bills, I’d be annoyed but not seriously damaged if interest rates rose rapidly. Which turned out to be the case.

If I’d bought 10-year notes, on the other hand, I’d have incurred serious risk because even though the Treasury will pay off the notes when they come due in 2032, their current market value would be considerably less than what I would have paid.

Which brings us back to Silicon Valley Bank (SVB).

It took what at the time were low-interest or no-interest deposits from its customers and bought long-term Treasury and mortgage-backed securities with the money. However, using the deposits that way exposed SVB to serious interest rate and liquidity risks.

When SVB needed big money in a big hurry a few weeks ago, it sold $24 billion of the securities in its portfolio to Goldman Sachs. And as I wrote recently it was forced to take a $2.5 billion loss ($1.8 billion after taxes) on the sale, primarily because the securities’ market prices had dropped substantially below what SVB had paid for them.

(Goldman paid a bit less than market price for the securities it bought from SVB. But the vast majority of SVB’s loss stems from the damage that rising interest rates inflicted on the securities, not from the Goldman discount.)

Customers line up outside of the Silicon Valley Bank headquarters, waiting to speak with representatives, in Santa Clara, California, U.S., March 13, 2023. REUTERS/Brittany Hosea-Small
Columnist Sloan: "SVB’s sad fate helps put things in perspective for me," Picture: Customers line up outside of the Silicon Valley Bank headquarters, waiting to speak with representatives in March.REUTERS/Brittany Hosea-Small

News of SVB’s big loss was a major factor in a massive deposit run-off that caused the Federal Deposit Insurance Corp. and California banking regulators to seize the bank and wipe out SVB’s stockholders and bondholders.

SVB’s sad fate helps put things in perspective for me.

Even though I’ve earned less interest by buying one-year T-bills than I’d have gotten by leaving my cash in Vanguard’s federal money fund, I’m a person, not a bank. So unlike SVB, I didn’t have depositors demanding that I give them big slugs of cash immediately.

Even though I messed up, I’m sure glad that I stuck to buying one-year T-bills last May rather than reaching for an extra 0.65% or so of annual interest by buying 10-year T-notes.

What will I do with the proceeds when my T-bills mature on May 18? I don’t know. But you can be sure that I won’t be putting all of it into one-year T-bills again.

Allan Sloan, who has written about business for more than 50 years, is a seven-time winner of the Gerald Loeb Award, business journalism’s highest honor. He’s won Loebs in four different categories over four different decades.

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