I feel like a lot of people are getting the wrong impression of exactly what "yield" they're getting

• 03/10/23

I feel like a lot of people are getting the wrong impression of exactly what "yield" they're getting from Treasury Bills. So I'm writing this post to cut through the jargon so that people will have an accurate expectation of what exactly it means when they see statements like "5.3% yield based on a 26 week bill being held to maturity." Because to many smart, reasonable people it would seem as if you are getting a 5.3% return on investment every 26 weeks. But that's NOT accurate. You'll notice in the description the term "annualized." This means something that's so misleading it's borderline ridiculous. So we all know there are 52 weeks in a year. If you're buying a T-Bill with a duration of 26 weeks it's literally by definition impossible to hold that for 52 weeks right? Because the bill "matures" after 26 weeks and that's that. But when you're seeing statements like "5.3% yield annualized based on a 26 week bill" a more accurate description of that would be "you're getting 2.65% yield every 26 weeks." Annualized is such a HORRIBLY misleading way to quote the yield on an instrument that by definition cannot be held for an entire year. In fact, there's absolutely NO WAY TO KNOW what the actual annualized yield of a T-Bill with a duration of less than a year is. What do I mean by that? Well when you're getting yield quoted on a 26 week bill as "annualized" what that's actually saying is this: "If you buy this 26 week bill today and in 26 weeks from now you buy a second 26 week bill with the EXACT same interest rate as the one you're buying today you'll get 5.3% for that 52 week period." But in reality.. there's absolutely no guarantee that in 26 weeks you'll get the same rate.. so.. annualized return numbers are based on an assumption. If you buy a 26 week bill today and the "annualized" return is 5.3% that means the actual 26 week return is only 2.65%. But say when the bill you just bought matures in 26 weeks and you go to buy another 26 week bill the "annualized" yield is only 4.5% then.. well that means for that 26 week period you're only actually gaining 2.25%. So your actual 1 year yield is only 4.9% 5.3% annualized (52 weeks) 2.65% real yield (26 weeks) 4.5% annualized (52 weeks) 2.25% real yield (26 weeks) 2.65% for the first 26 weeks + 2.25% for the second 26 weeks ----------------- 4.9% actual yield for 52 weeks. So the 5.3% yield you were quoted was basically a lie. To be clear, I'm not accusing Public of being intentionally misleading. I'm accusing the entire structure of the Treasury system of being intentionally misleading. Public had nothing to do with how these yields are quoted. In their disclosure they absolutely note how the return they're quoting is annualized. So I'm not accusing Public of anything shady or nefarious. That being said. If your were to go to rent a car tomorrow and after all fees and everything included you are told the per day rate is $100 per day and you return that vehicle after 2 days you'd expect a bill of $200 right? $100 per day *2 days. What would you think if you got to the checkout counter and they told you "that'll be $36,500 annualized." I mean.. yeah.. if I rented a vehicle at $100 a day for an entire calendar year, sure.. I'd owe $100*365.. so $36,500.. but I only rented it for 2 days.. so why would I get a bill quoting rental for an additional 363 days? By definition you cannot hold a 1 month T-Bill for a year. So in what universe does it make sense to quote returns based on the assumption that you are able to purchase that 1 month bill with the same rate of return each month for a full year? So to lay this out as clearly as possible. If you're buying a 1 month T-Bill seeing a yield of 5% that does NOT mean that if you bought a T-Bill with $100 that in 30 days you'll have $105. In reality you'll only have $100.42 because that 5% yield is for a full year. To get your actual 30 day yield you'd need to divide 5% by 12 because there's 12 months in a year. That means the actual 30 day yield is 0.42% If you were to purchase a 1 month T-Bill with a 0.42% 30 day yield every month for a full year you'd end that 12 month period with a 5% return. "Well why would they tell me I'm getting 5% when I purchase something that's impossible to hold for a year, and impossible to know if the rate I get next month is higher or lower than this month?" Excellent question. I don't know. Because there's no other area I can think of where you're quoted a price beyond what you're asking for. "Yes sir I'd like to know how much a dozen eggs are" "Well, 6.5 dozen costs $45" "Yeah... Cool.. but I'm only asking about one dozen" "Well if you bought 1 dozen every month for a full year you'd pay $200" "Bro.. I don't know if I'm going to want eggs next month.. I also don't think you know exactly what they're going to cost every month for the rest of the year" "Well if you take the square root of Pi.." It's legitimately insane. I know I'm not the only person who assumed that the quoted yield applied to the actual duration of the bill. So a 3 month T-Bill with a 5.5% yield means that I'll get 5.5% every 3 months.. because that's how long the bill is good for.. But that's not how it works. I haven't seen anyone directly address this so I'm doing it. A 5.3% annualized yield means you're getting 0.44% per month. That's your actual yield. And if you continue rolling that money into buying new bills each time yours matures, and the rate is the same then as it is now, you'll end up with 5.3% after 12 months. But if the rates are higher or lower when you go to buy a new bill your annualized return will be higher or lower than 5.3% Hopefully this made sense to you and answered a question that I KNOW many people have. #treasurybill #tbillinvesting #yield //// Come join my community of fellow investors from all walks of life all learning together https://discord.gg/GaUxA4dvZs

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