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Monday, December 8, 2008

T-Bills: 2396 Years to Make Up YTD Equity Loss

0.005% on T-Bills is low. How low? So low that the WSJ tries to grasp just how low, but reports a return figure that is incorrect by a factor of ~25:

It isn’t easy to savor a stock-market rally of this type when over in the credit markets, the Treasury Department held a three-month auction and was able to sell what it wanted at the ridiculous yield of 0.005%, down from 0.15% two weeks ago. (If you invest $1,000 in three-month bills, you get an extra $5 after one year of doing this. There are mattresses on the market that do actually yield more than this.)
This is wrong on two levels:
  • Math; 0.005% is 5 cents per $1000
  • Bond math; T-Bill yields are calculated on a coupon yield basis (more detail here), so it is closer to a 20 cents per $1000 (4 quarters of receiving 5 cents), not $5.
While this is not exactly 0.02% annualized, lets assume it is to make my EXTREME example easier to calculate.


If you just pulled an investment from the S&P 500 (down 38.4% YTD), put it in T-Bills, nothing changed EVER (i.e. rates stay for eternity at 0.005%), and you rolled your investment for eternity, it would take 2396 years to make up the S&P 500's current YTD loss (year 4403 is right around the corner!). Now that is EXTREME.