Client Portals

Treasuries, Patience, Bits4 min read

Sep 28, 2022 - Max Osbon ( 5 mins to read)

Treasuries

Treasury yields are drawing attention now that they yield between a 2-4% risk-free rate of return. Treasury Bills (TBills) are liquid and commonly used by financial professionals, but most people are only vaguely familiar with what they are and how they work. For example, Warren Buffett keeps Berkshire Hathaway’s cash in T-Bills. We last used TBills in 2018, when rates were briefly sitting at 2.5%. Anyone who has been accumulating or holding onto cash can now earn fairly attractive guaranteed returns on their cash, paid for by the US government.

This is a bit of an odd situation and is likely to be temporary. As of now, the Fed is expected to continue to raise rates until they hit 4.5%, up from 3.25% currently. Banks do not pay 2-4% on deposits, so the Treasury has now emerged as a massive competitor for bank deposits because why hold money in a bank paying just 0.1%? In some cases, real estate is now in competition with TBills because a 4% risk-free return is easier than unwriting a new development with a marginally better return opportunity. We feel this will be temporary because the same long-term forces that pushed rates closer to 0% are still in effect. Those long-term forces are being superseded by the temporary goal of the Fed of raising rates to get inflation under control.

If you’d like to understand more about how T Bills and other Treasury securities work, please let us know.

Patience

There is a lot happening in markets globally. The British Pound just hit a low of $1.03, and the Bank of England pivoted to buying their own bonds to support their bond market. We mentioned on Sept 7th that the Pound looked like it was heading toward parity. Markets continue to move faster than ever. It’s important to remember that panics don’t last. Lumber is now below its January 2020 price, down from a high of 4x the historical average. It took a while, but we pointed out in May 2021 that the lumber panic wouldn’t last. The international shipping rate panic did not last either. On Sept 2021 we wrote about how international shipping rates were peaking at 10x the historical average. They are now down -75% since then and dropping at the rate of -6% per week. There is still room for it to fall further before getting back to the historical average.

This is partly why some people say inflation is transitory. These price panics were driven by Covid and pushed to extreme and unsustainable levels. The toughest part of the inflation picture is housing/shelter, which is 40% of the CPI (inflation) index. Rents and home prices don’t move as quickly as commodity markets like lumber, gasoline or international container shipping rates. We are still collectively processing the aftershocks of Covid and lockdowns and we still have more to deal with. Long Covid will end up having a material impact on the global economy as well in terms of early retirement due to disability, lost productivity, mental fog and continuous stress on the health care system. Patience will pay off as we get through these aftershocks.

Interesting Bits:

  • NVidia’s September keynote address on Youtube had ~20 million views in less than a week. That strikes me as high for a 90 minute corporate presentation. Given that Youtube pays its creators a share of ad revenue, I’d estimate NVidia generated $100k from that one video. It’s a negligible amount for a $300B market cap company, but it begs the question: why aren’t more companies doing their keynotes and earnings calls on youtube and getting paid for it?
  • Cloudflare announced a $1.25B venture fund with 26 participating VCs available to new companies building on their Workers platform. This is a powerful growth tool for everyone involved in that ecosystem.
  • “VCs sitting on record cash”: You’ve probably seen headlines about VC’s sitting on record cash. $538 billion is one estimate. For context, that is committed capital (promised capital from LPs) and not an actual cash balance. When VCs eventually call that capital, LPs will typically have to sell assets or borrow against them. This can be difficult for LPs when markets are down. LPs either don’t want to sell in a down market or don’t want to borrow on lines of credit that are much more expensive than they used to be.

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