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Earn More On Your Cash Savings (With Less Risk)

Explaining the TreasuryDirect program
Friday, November 3, 2017, 8:35 PM

Back in my June report Less Than Zero: How The Fed Killed Saving, I explained how the Federal Reserve's policy of holding interest rates at record lows has decimated savers. Those who simply want to park money somewhere "safe" can't do so without losing money in real terms.

How bad is it?

As this table shows, the average bank savings account today pays a paltry 0.06% interest rate to depositors:

(Source)

That's virtually the same as getting paid 0%. But it's actually worse than that, because once you take inflation into account, the real return on your savings is markedly negative.

As I ranted back in June:

0.06%.

Not 0.6%. And definitely not the 6% I remember receiving when I was a teenager. 0.06%.

As in, put $100,000 into your savings account and get back a whopping $60 per year. 

Are you kidding me? $60 to have a hundred grand parked in an account subject to withdrawal restrictions and penalties, along with the usual smattering of administrative fees both overt and hidden? At a bank that stumbled mightily during the Great Financial Crisis? One with the potential to legally confiscate your savings through a "bail in" should another crisis hit?

Oh, and if you factor in the government's trailing 12-month inflation rate of 2.2%, your "savings" account has a negative (-2.14%) real rate of return. Your compounded savings actually loses purchasing power over time. And as we all know the official inflation rate is farcically understated, your loss of purchasing power is even more dire than it at first appears.

And to get your blood boiling further, when your local TBTF bank stores its own money at the Fed, the Fed pays it over a full 1% in interest -- that's 20 times what your bank is paying you. Your bank simply pockets the rest as pure risk-free profit. (Don't believe it? Watch Chris explain in this video).

As usual, the banks get a sweet deal while the people they purport to serve get screwed.

If You Can't Beat 'Em, Join 'Em

As we've written about often at PeakProsperity.com, the Fed's chronic super-low interest rate policy is part of a deliberate policy playbook that economists call Financial Repression. Rock-bottom interest rates serve two important goals of the central planners: they sustain the government's debt orgy while making the elites filthy rich in the process.

The bad news here is that The Powers That Be are going to continue to pursue financial repression at all costs, for as long as possible. They have both too much to gain and too much to lose to do otherwise. The war on savers is not going to let up.

But there's also a little good news buried here, too. Individual investors savvy enough to understand the game being played can bend some of its rules to their favor and limit the damage they suffer a bit.

One of them enables you to get 16x more interest on your cash savings than your bank will pay you. With no additional risk (and perhaps even reducing risk).

TreasuryDirect

For those not already familiar with it, TreasuryDirect is a service offered by the United States Department of the Treasury that allows individual investors to purchase Treasury securities such as T-Bills, notes and bonds directly from the U.S. government.

You purchase these Treasury securities by linking a TreasuryDirect account to your personal bank account. Once linked, you use your cash savings to purchase T-bills, etc from the US Treasury. When the Treasury securities you've purchased mature or are sold, the proceeds are deposited back into your bank account.

So why buy Treasuries rather than keep your cash savings in a bank? Two main reasons:

  • Much higher return: T-Bills are currently offering an annualized return rate of over 1%. Notes and bonds, depending on their duration, are currently offering between 1.5% - 2.75%
  • Extremely low risk: Your bank can change the interest rate on your savings account at any time -- with Treasurys, your rate of return is locked in at purchase. Funds in a bank are subject to risks such as a bank bail-in or the insolvency of the FDIC depositor protection program -- while at TreasuryDirect, your funds are being held with the US Treasury, the institution with the lowest default risk in the country for reasons I'll explain more in a moment.

Let's look at a quick example. If you parked $100,000 in the average bank savings account for a full year, you would earn $60 in interest. Let's compare this to the current lowest-yielding TreasuryDirect option: continuously rolling that same $100,000 into 4-week T-Bills for a year:

  1. Day 1: Funds are transferred from your bank account to TreasuryDirect to purchase $100,000 face value of 4-week T-Bills at auction yielding 1.035%
  2. Day 28: the T-Bills mature and the Treasury holds the full $100,000 proceeds in your TreasuryDirect account. Since you've set up the auto-reinvestment option, TreasuryDirect then purchases another $100,000 face value of 4-week T-Bills at the next auction.
  3. Days 29-364: the process repeats every 4 weeks
  4. Day 365: assuming the average yield for T-Bills remained at 1.035%, you will have received $1,035 in interest in total throughout the year from the US Treasury.

$1,035 vs $60. That's a 16.25x difference in return.

And the comparison only improves if you decide to purchase longer duration (13-week or 26-week) bills instead of the 4-week ones:

Repeating the above example for a year using 13-week bills would yield $1,149. Using 26-week bills would yield $1,286. A lot better than $60.

Opportunity Cost & Default Risk

So what are the downsides to using TreasuryDirect? There aren't many.

The biggest one is opportunity cost. While your money is being held in a T-Bill, it's tied up at the US Treasury. If you suddenly need access to those funds, you have to wait until the bill matures.

But T-Bill durations are short. 4 weeks is not a lot of time to have to wait. (If you think the probability is high you may to need to pull money out of savings sooner than that, you shouldn't be considering the TreasuryDirect program.)

Other than that, TreasuryDirect offers an appealing reduction in risk.

If your bank suddenly closes due to a failure, any funds invested in TreasuryDirect are not in your bank account, so are not subject to being confiscated in a bail-in. 

Instead, your money is held as a T-Bill, note or bond, which is essentially an obligation of the US Treasury to pay you in full for the face amount. The US Treasury is the single last entity in the country (and quite possibly, the world) that will ever default on its obligations. Why? Because Treasurys are the mechanism by which money is created in the US. Chapter 8 from The Crash Course explains: 

As a result, to preserve its ability to print the money it needs to function, the US government will bring its full force and backing to bear in order to ensure confidence in the market for Treasurys.

Meaning: the US government won't squelch on paying you back the money you lent it. If required, it will just print the money it needs to repay you.

So, How To Get Started?

Usage of TreasuryDirect is quite low among investors today. Many are unaware of the program. Others simply haven't tried it out.

And let's be real: it's crazy that we live in a world where a 1% return now qualifies as an exceptionally high yield on savings. A lot of folks just can't get motivated to take action by a single percentage point. But that doesn't mean that they shouldn't -- money left on the table is money forfeited.

So, if you're interested in learning more about the TreasuryDirect program, start by visiting their website. Like everything operated by the government, it's pretty 'no frills'; but their FAQ page addresses investors' most common questions.

Before you decide whether or not to fund an account there, be sure to discuss the decision with your professional financial advisor to make sure it fits well with your personal financial situation and goals. (If you're having difficulty finding a good one, consider scheduling a free discussion with PeakProsperity.com's endorsed financial advisor -- who has considerable experience managing TreasuryDirect purchases for many of its clients).

In Part 2: A Primer On How To Use TreasuryDirect, we lay out the step-by-step process for opening, funding and transacting within a TreasuryDirect account. We've created it to be a helpful resource for those self-directed individuals potentially interested in increasing their return on their cash savings in this manner.

Yes, we savers are getting completely abused by our government's policies. So there's some poetic justice in using the government's own financing instruments to slightly lessen the sting of the whip.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

NOTE: PeakProsperity.com does not have any business relationship with the TreasuryDirect program. Nor is anything in the article above to be taken as an offer of personal financial advice. As mentioned, discuss any decision to participate in TreasuryDirect with your professional financial advisor before taking action.

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8 Comments

robbie's picture
robbie
Status: Bronze Member (Offline)
Joined: Jul 16 2008
Posts: 96
Slightly hgher risk alternative for higher rate...

For those who perceive the potential risk of bank failure or bail-in to be low and don’t want to tie up their funds, Capital One is now offering 1.3% on their easily linkable 360 Money Market. (Bauer Financial rating = 4 out of 5 stars).

 

Arjen's picture
Arjen
Status: Member (Offline)
Joined: Mar 11 2010
Posts: 2
I would never buy United

I would never buy United States treasury bonds, because you are supporting the US government, the government that subverts democracy all over the world; the big, evil empire. More than 50% of the US federal budget goes to some sort of military associated purpose. Do I really have to give up my morals just for some financial gain? That attitude is exactly the one that brought us to this horrible state of the world in the first place.

Uncletommy's picture
Uncletommy
Status: Gold Member (Offline)
Joined: May 3 2014
Posts: 426
Sinking ships or rising tides?

Mr. Powell suggests that the FED rate should increase before reducing the FED's balance sheet. Seems convenient that sequestered FED assets being put on the market after rates increase, favors only one segment of the markets - BANKS! Low unemployment may seem like a good fit, but with wages still in the toilet and a pending rate increase, can more wage disparity be far behind? I can't wait to take my spare $100,000 and stick it into T-bills just to keep up with inflation.

speakeasy's picture
speakeasy
Status: Member (Offline)
Joined: Jun 5 2016
Posts: 2
online banks have good interest rates

To reiterate the previous post for those who don't want to tie up their funds and who perceive the risk of bank failure or bailout low (and keeping in mind the FDIC insured amount up to $250K), online banks are paying a much better interest rate than brick and mortar banks. For example CIT Bank and Ally Bank currently have No Penalty CD's at around 1.5%. Their savings accounts rates are just slightly under this. And some savings accounts at other online banks are paying 1.5%. There is a great blog called My Money Blog which tracks this, check out their most recent article here: http://www.mymoneyblog.com/best-interest-rates-cash-november-2017.html

Cornelius999's picture
Cornelius999
Status: Gold Member (Offline)
Joined: Oct 17 2008
Posts: 357
Argen, I share your concern

Argen, I share your concern about investing in US bonds but feel there may not have been much democracy left in the world without the power of the US up to recent decades. It's definitely a concern now but democracy as we know it was probably always a fragile flower?

DennisC's picture
DennisC
Status: Silver Member (Offline)
Joined: Mar 19 2011
Posts: 227
Informative Link

Thanks for that.  FWIW, if one has a brokerage account, and you'd like to take an alternate approach, you may be able to purchase FDIC-insured bank CDs of varying maturities, Treasury and other Fed. agency issues, and corporate or municipal issues, with little or no fee.  BTW,  I used to be a fan of the Series I savings bonds until they instituted the annual cap on purchases.

AKGrannyWGrit's picture
AKGrannyWGrit
Status: Gold Member (Offline)
Joined: Feb 6 2011
Posts: 391
Its Not Fair

“The bad news here is that The Powers That Be are going to continue to pursue financial repression at all costs, for as long as possible. They have both too much to gain and too much to lose to do otherwise. The war on savers is not going to let up.

But there's also a little good news buried here, too. Individual investors savvy enough to understand the game being played can bend some of its rules to their favor and limit the damage they suffer a bit.”

Thanks Chris, just wanted to add my curmudgeonly 2 cents-

Stating The Obvious, well it should be anyway, as Mrs. Middle America I SHOULD NOT have to play a financial game to just survive or get ahead.  And it’s hard to bend the rules in ones favor when a) we don’t know what they are or b) the rules change.

Yes, I understand that this article was written for the well-do Upper Middle Class.  But hey, I am not among that group, and I don’t have have piles of cash looking for a reasonable return. Nope, I am part of the group that knows that QE means quiet exsanguination of our finances and we are being sucked dry by a corrupt system. Yep, a huge majority of us are just happy to have the lights still on and food on the table.  Just wanted all you well-to-do folks to be reminded that many of us have no chance at playing the above referenced game.  Something tells me if I/we don’t get to play in the game our chances of winning are about equal to zero.

AKGrannyWGrit

 

 

Cornelius999's picture
Cornelius999
Status: Gold Member (Offline)
Joined: Oct 17 2008
Posts: 357
Historical Wealth Transfer

In 1939 - 40 Britain stood alone against a possible Nazi invasion.  " Churchill wanted all the nation's gold and securities shipped across the Atlantic not least to pay for military equipment and materials. What resulted was the biggest movement of national wealth in the world's history."  " Part of what was being proposed in ' Operation Fish' was that the Government should take over the investments of every private citizen, without ever obtaining their consent, and ship them across the Atlantic without their knowledge". Only £ 3.75 Million was left in the Treasury at the end of 1940.

         page 238  " Operation Sealion, 2014  --- Leo McKinstry

What covert wealth transfers are planned or in operation at present?

 

 

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