Treasuries in lieu of cash for emergency fund?

[bostonimproper]

We like to keep about 12 months of expenses in our emergency fund. I have started shoveling some of that into I Bonds, but we still have cash leftover that isn’t really doing much.

For now it’s mostly sitting in a 2% HYSA, but I’m wondering with Treasuries sitting around 3.25-4% whether it might make sense to create a Treasury ladder with 3-month and 6-month bonds. Not a huge dollar gain, maybe a couple thousand at most, but seems silly not to take advantage of the high yields.

What y’all think?

[jacob]

An emergency fund is something that can be tapped immediately. Anything else is a short term investment.

Also doesn't cashing out I-bonds early mean losing N months of interest?

[bostonimproper]

@jacob Yes, cashing out I Bonds early has a 3 months interest penalty. But considering current nominal 9.6% annual rate, comes out far ahead of 2% HYSA.

I was thinking that 3 or 6 months is a short enough time frame to be able to float an emergency on credit if needed (high credit limit, typically get 1.5 months to repay). But I see your point on it being more short term investment.

[Western Red Cedar]

I've been considering something similar recently - a balance of i bonds, cd ladder, and cash. To Jacob's point above, I think the key question is how much you actually need in your emergency fund? If you have the ability access credit or other funds without selling stocks in a bear market, you probably don't really need more than 3-6 months in cash.

[WFJ]

Always have cash for emergencies or a credit card with a $20k or no limit. I've slowly built a 6-12 month bill ladder where every month, 6 and 12 month bills rollover, but two years ago, this would have been a mess if I didn't have cash. Was rear-ended in a minor accident, sent car to insurance repair shop, a few days later, insurance said the car would have to be totaled and only had two days to find a new car. Barely had cash to buy car, could not have even settled cash from stocks and would have had to borrow against bonds to get cash. Cash is costly on the return of a portfolio, until you need it.

[theanimal]

You might find this thread useful: viewtopic.php?t=12276

[bostonimproper]

@theanimal Ha, fair. I’m probably sitting on too much cash, given how much I’m trying to seek out higher yields with it.

[CS]

I found having a Treasury ladder really useful. Plus, in our state, the interest was not taxed. Not sure if that is for every state. I stopped during the pandemic because I spent that cash while hunkering down, but now that more income is coming, I'll probably set that up again.

For the OP's situation, hard to imaging needing 12 months of expenses immediately. Since you can get three-month bills, you only need three bunches of money, cycling through. You can make multiples buys in smaller amounts so you don't need to cancel the reinvestment of a large amount to get some cash. Treasury Direct is functional enough once as a website once you get used to. Plus, it is another location to have money, reducing the risk of any one brokerage taking everything down with it.

For most situations it seems a high limit credit card will save the day in the weeks until where more cash will be available.

[MBBboy]

There's no reason to rely on a credit card when dealing with Treasuries in an emergency fund - they are liquid in the secondary market. You can just sell them for cash, and take small haircut (or book a small gain) depending on the market valuation. The variability isn't like stocks - we're not talking about giant swings.

If you want a treasury ladder as part of your emergency plan, I say have at it.

[unemployable]

I found having a Treasury ladder really useful. Plus, in our state, the interest was not taxed. Not sure if that is for every state.

Interest on US government debt is tax-free in every state. This includes the principal adjustment on TIPS.

[CS]

Good to know about the taxes.

I also forgot about the 4 week bills. Set up weekly reinvestments of four bunches of money and it is quick work to get money if needed. (Just buy in multiple small amounts and not huge chunks, so you can just pull what is needed.)

[IlliniDave]

What y’all think?

As I've transitioned into the FI realm (at first while still working, then later after retiring) I've made less of a distinction out of what could be considered an old school emergency fund. Like most things related to finance my belief is that it's a matter of temperament. Although it is not rigidly structured as such, there are some parallels between my deployment/allocation strategy and the so-called bucket system approach, so I do have an amount of cash that I could call a traditional emergency fund if I wanted. I just don't think of it that way any more. My attitude evolved into: when push comes to shove all of my assets form a giant emergency fund, so it's just a matter of deploying assets in a holistic way I'm comfortable with. I sleep a little better knowing I have a reserve of money in a simple deposit account.

Once a person is retired there is little distinction between an emergency fund, the main purpose of which is to survive disruptions in income (for someone who has advanced beyond living paycheck-to-paycheck), and a retirement fund, the purpose of which is to replace income that has been permanently disrupted. So depending on where one is in that journey (not sure where you're at), and one's basic temperament, I don't see any problem with reaching for some yield with treasuries. I personally would keep some amount in a cash account since when combined with a debit/ATM card you can access it quickly and at times when markets are closed, but one doesn't really need 12 months of expenses available in that manner.

I wouldn't say someone should "invest" their emergency fund--more than math goes into personal investing--but it doesn't add much more than a small dollop of inconvenience for someone of above average means.

[Western Red Cedar]

Can someone elaborate on the tradeoffs between a treasury ladder and a CD ladder? Are the benefits from the treasury ladder primarily associated with tax on the interest?

[unemployable]

Better liquidity. Treasuries can be sold in the secondary market at any time. If you cash a CD early you lose most of your interest. Remember "substantial penalty for early withdrawal"?

[Western Red Cedar]

Better liquidity.

Thanks! Are the returns slightly smaller in exchange for the liquidity?

[unemployable]

Thanks! Are the returns slightly smaller in exchange for the liquidity?

Typically yes, but due to the shape of the yield curve sometimes may not be. Right now I'm seeing CDs going for 20-50 bps over Treasuries, although for 1-2 year maturities the spread is much smaller.

There are also brokered CDs, which right now tend to be a much better deal than traditional bank CDs. They can as well be traded on the open market.

If you have a brokerage account, there should be a tab somewhere for "Bonds and CDs". Today is a holiday in the bond market so no transactions until tomorrow... from the behavior of bond ETFs rates will be going higher.

[Lemur]

I'll try to use a short-term maturity as an example:

Current 3 month CD rates are about 1.75% APY. So 0.4375% for 3 month yield. If you sell early you lose most of this profit due to penalty of early withdrawal but you'll keep the principle investment.

3 month Treasury Bills are yielding 3.32% (annualized) so divided by 4 that is 0.83% for a 3 month yield. If you sell early, you may or may not profit (you could even take a small loss) so it is more of a judgement call - I'm thinking in an increasing interest rate environment you'd want to hold short-term treasuries to maturity rather then sell them on the open market. Because increased interest rates (which look very likely with the recent jobs report and the Feds continued Hawkish stance) will continue to cause decreasing bond prices (bond investors will chase higher yielding bonds instead of buying yours), so you'd likely end up with a loss if you sell early. So in that regard...I'd wager that the return would definitely be smaller if you sold early but maybe not by much considering the term length is so short.

Treasuries are about 2x the profit in this case. The treasuries are yielding higher than CDs due to increased interest rate risk. I'm really not sure if it is a concern (choosing between Treasury or CD ladder) if the ladder is setup appropriately for money to always inflow to the investor. I think the shortest CD terms are 30 days so even if you had an emergency in 30 days...you could just stick the expense on a credit card (potentially getting points too) and then when your CD money / Treasury Money comes in, pay it off. But treasuries do provide better liquidity if that is the goal (especially if the expense ends up becoming real high) but the preservation of capital is more likely with the CD (lower risk).

I think it is tough to say for sure which ladder type has more of an advantage, but I'd probably go with the treasury ladder for the liquidity advantage and better yields over the long-run.