Protecting Cash with TBills
Over the past several months, we have been proponents of using US Treasuries as an inflation hedge tool. Little did we know that this may also be a useful tool in case of bank failures.
We think it is important to note how rare the SVB collapse was. There is no need to install fear in a strong system. However, we believe that there are prudent steps all of us can take to to be better prepared next time.
Startups & growing small businesses often accumulate cash reserves as they grow and expand, but holding large sums of cash in bank accounts can be risky during times of economic instability.
The Federal Deposit Insurance Corporation (FDIC) insures deposits in banks and thrift institutions up to $250,000 per depositor per insured bank, but this limit may not be enough to cover all of a startup's excess cash. This means that if you have 4 checking accounts at ONE bank, your total insured amount is still $250k.
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1Diversify & Hedge Against FDIC RiskHolding excess cash in a bank account exposes a startup to the risks of bank failures, economic instability, and inflation. Investing in US Treasury bills can help diversify a startup's portfolio and reduce these risks.
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2Preservation & Inflation Hedge
US Treasury bills offer a fixed rate of return that is not affected by changes in interest rates or inflation. This means that startups can preserve their capital and maintain their purchasing power over time.
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3LiquidityUS Treasury bills are highly liquid and can be easily bought and sold on the secondary market. This means that startups can access their cash quickly if they need to.
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4Ex: Rolling 6 Month T Bills w/ Excess Cash
Let’s assume you maintain an average balance of $300,000 in your business checking account. The overage is not enough to justify a new banking relationship. However, we want to maintain liquidity AND hedge inflation over the next few years.
Let’s explore using our Rolling Treasuries Strategy in a simple example:
Assuming an initial investment of $50,000 in a 6-month Treasury bill with a yield of 5.07% (March 2023), and reinvesting the principal and interest at maturity every 6 months, we can calculate the compounded interest as follows:
Interest earned on the initial investment:
Interest = Principal x Yield
Interest = $50,000 x 0.0507
Interest = $2,535
We can then reinvest this amount in another 6-month Treasury bill with a yield of 5.07%. After another 6 months, the investment will be worth:
Value = Principal + Interest
Value = $52,535 + $2,665.27 (= $52,535 x 0.0507/2)
Value = $55,200.27
We can continue this process of reinvesting the principal and interest every 6 months for a period of 2 years (i.e., 4 times).
The final value of the investment will be:
Value = $50,000(1 + 0.0507/2)^4 + $50,000 x 0.0507/2 x [(1 + 0.0507/2)^4 - 1]/(0.0507/2)
Value = $57,240.36
Therefore, the compounded interest of an initial investment of $50,000 in a 6-month Treasury bill with a yield of 5.07%, and reinvesting the principal and interest at maturity every 6 months for a period of 2 years, would result in an ending balance of $57,240.36.