Allocating to Government Debt
Treasury bills (T-bills) are short-term debt securities issued by the US Treasury. Purchasing T-bills is the same as lending money to the government with the loans lasting 1-, 3-, 6-, or 12-months. They are considered one of the safest investments because they are backed by the full faith and credit of Uncle Sam and are very liquid (i.e., easily converted to cash). T-bills are an essential component of any corporate treasury management program, providing a low-risk investment option for idle cash. This can be an attractive alternative to storing idle cash in bank savings accounts or money market funds.
However, investing in T-bills presents a few problems. For starters, which maturity should you hold? If we plot the yields of T-bills as a function of their maturities we get a yield curve. The shape of the yield curve can vary over time. It can be upward sloping, downward sloping, or flat. Figure 1 shows the yield curve for two different dates.
If you wanted to buy a T-bill on September 30th of last year, you might have considered the 6-month T-bill since it had the highest yield. On December 30th perhaps the 12-month T-bill was your best bet. Owning the highest yielding T-bill, however, does not always lead to the highest total return.
A critical step in determining your best option is to figure out how long you want to own a T-bill. If you buy the 6-month then should you sell it the following month or hold it to maturity? Another possibility is to buy an equal amount of each T-bill (1-, 3-, 6-, and 12-month), sell them after one month, and repeat.
Once you have chosen a strategy, you must choose someone to trade the portfolio. Who will you find to transact in the market on your behalf?
Let Treasure Optimally Allocate to T-Bills
The Quantitative Investment Team at Treasure Financial has developed a proprietary investment strategy that takes the guesswork out of allocating your idle cash. We systematically identify the optimal T-bill maturity to own via our proprietary quantitative algorithm. The result is an actively managed strategy with much better returns and lower risk characteristics relative to the previously mentioned naive approaches.
Let’s examine how this strategy performed historically. Figure 2 shows the wealth generated by investing $10 million in the Treasure strategy and comparing that to three different benchmarks.
6 is the first benchmark (shown in gray) and is the performance of a static allocation to the 6-month T-bill. Equal is the second benchmark (shown in red) which is an equally weighted portfolio of 1-, 3-, 6-, and 12-month T-bills. Maintaining static or equally weighted portfolios is an extremely common investment strategy. However, it’s not the best solution. Perfect is the final benchmark (shown in blue) which is a perfect foresight strategy. This allocation cheats by looking ahead, one month into the future, and invests in the best performing T-bill. In practice, no model will be correct all of the time, however we see that Treasure is closest to Perfect and handily outperforms Equal and 6.
What about risk? Is this strategy riskier than simply equally weighting? Let’s consider the drawdown of each strategy shown in Figure 3.
Drawdown refers to how much a given portfolio has lost from the most recent peak before it recovers. Not too suprisingly Perfect has no drawdown. However, it is interesting to consider the maximum drawdown for each of the other three strategies. Treasure and 6 have maximum drawdowns of 5 and 17 basis points compared to 34 basis points for Equal.
Next, let’s consider the portion of the time each strategy has positive performance. Figure 4 shows rolling 9-month returns for each portfolio.
Again, it is not too surprising that Perfect is positive 100% of the time. The Treasure, Equal, and 6 portfolios are positive 94%, 80%, and 86% of the time, respectively.
Table 1 shows summary statistics for each portfolio.
Note, Excess Return is reported in excess of the 1-month T-bill and Efficiency is the number of months it takes a given strategy to recover from the worst (maximum) drawdown. Here are some interesting observations:
- Treasure outperforms Equal by 0.39%.
- Treasure has the same volatility as Perfect.
- Treasure is 8.5x more efficient than Equal.
- Equal has 7x the maximum drawdown as Treasure.
T-bills are an essential component of any corporate treasury management program. However, deciding which maturities to buy and determining how long to hold them are extremely difficult to execute successfully. The Quantitative Investment Team at Treasure Financial has developed a proprietary and systematic investment strategy that solves this problem. The strategy outperforms an equally weighted allocation to 1-, 3-, 6-, and 12-month T-bills on both an absolute and risk-adjusted basis.
Fortune 500 companies have world-class treasury management departments managing their T-bill investments. Shouldn’t you?
Treasure Financial Investment Team
Our seasoned team has nearly 60 years combined experience, has managed billions in assets, and has worked at some of the most recognized names in finance.
Ben Verschuere, Co-Founder/CIO
15 years in financial markets
10 years as portfolio manager for Peter Thiel hedge fund & family office
Pablo Mitchell, Head of Quantitative Investment
20 years in financial markets
16 years as quantitative portfolio manager at TIAA
Luca Rassenti, Director Quantitative Investment
10 years in financial markets
Investment Officer at Iowa & New Mexico state pension funds
Scott Williams, Chief Compliance Officer
13 years in Fintech regulation and compliance
Head of compliance at SoFi & Figure