Investing: How I really screwed up the interest game

If you want an example of how someone can get carried away by seemingly high interest rates, you don’t have to look at huge financial failures like Silicon Valley Bank, RIP

Instead you can look at me.

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

Oops. The Federal Reserve kept pushing interest rates higher and higher. And higher. Much quicker than I expected, despite my 50+ years of reporting on the financial markets.

It turns out I would have earned significantly more interest income — about 50% more, according to money market fund expert Pete Crane of Crane Data — if I’d 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 a lot of my wife’s and mine’s money is invested.)

US Treasury Secretary Janet Yellen had much to say to Congress about the collapse of the Silicon Valley bank. But what about our columnist Allan Sloan’s premature switch to 1-year T-bills? REUTERS/Mary F Calvert

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

If you were like me in the Treasury Department debt auction last May 19, you would have paid $9,788 for a T-bill that the Treasury Department will cash next May 18 for $10,000.

Do the math by dividing $10,000 by the purchase price and you can 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 more than 2% was very attractive. However, the money fund’s yield quickly began to rise as the Fed continued to hike interest rates. When I last checked, the fund’s seven-day return was 4.72%. However, the T-Bills’ yield to maturity remained at 2.17% because T-Bills are a so-called “fixed income” investment.

In response to my query, Pete Crane estimated what he believes the Vanguard Money Fund will have generated for the year ending next May 18th. His estimate: 3.12%. A Vanguard spokesman, using a slightly different estimate, came up with a similar number: 3.26%.

In any case, it’s about 50% more than I made on my T bills.

Oh well.

In my own defense, I bought 1-year T-bills rather than longer-dated securities like 10-year Treasury bills, thinking that if I limited myself to buying only 1-year notes, I would be annoyed but not seriously hurt Interest rates rose rapidly. Which turned out to be.

On the other hand, if I had bought 10-year notes, I would have been taking a serious risk because although the Treasury will redeem the notes when they mature in 2032, their current market value would be significantly lower than what I would have paid for.

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

It took what were then low-interest or interest-free deposits from its customers and used the money to buy long-term government bonds and mortgage-backed securities. However, using the deposits in this way exposed the SVB to serious interest rate and liquidity risks.

A few weeks ago, when SVB needed the big bucks in a big hurry, they sold $24 billion of the securities in their portfolio to Goldman Sachs. And as I recently wrote, the company had to post a loss of $2.5 billion (1, $8 billion after tax) from the sale, largely because the market price of the securities had fallen well below what SVB paid for them.

(Goldman paid slightly less than the market price for the securities SVB bought. But the vast majority of SVB’s loss stems from the damage done to the securities by rising interest rates, not Goldman’s discount.)

Customers queue outside the Silicon Valley Bank headquarters in Santa Clara, California, the United States, March 13, 2023, waiting to speak with representatives.  REUTERS/Brittany Hosea-Small

Columnist Sloan: “The sad fate of SVB helps me put things into perspective.” Image: Customers queue outside Silicon Valley Bank’s headquarters waiting to speak to representatives in March.REUTERS/Brittany Hosea-Small

News of SVB’s big loss was a major factor in a massive deposit drain that swept the Federal Deposit Insurance Corp. and prompted California banking regulators to seize the bank and wipe out SVB shareholders and bondholders.

The sad fate of the SVB helps me put things into perspective.

Even though I’ve earned less interest by buying 1-year T-Bills than I would have if I had put my money in Vanguard’s federal money fund, I’m a person, not a bank. So, unlike the SVB, I didn’t have any depositors demanding that I give them large amounts of cash immediately.

Even if I screwed up, I’m sure glad I stuck with buying 1-year T-bills last May instead of earning about 0.65% additional annual interest by buying 10-year T-notes.

What do I do with the proceeds when my Treasury bills mature on May 18? I don’t know. But rest assured I’m not putting it all back into year-long T-bills.

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 has won Loebs in four different categories over four different decades.

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