Why I Invested 60% of My Portfolio into 3-Month Treasuries

I’ve kept cash on the sidelines waiting for a pullback in stocks. But last week, I decided to put the money to better use. I locked 60% of my total portfolio into 3-month U.S. treasuries with a 2.445% yield.

Three months isn’t long to wait and I’ll likely roll into new 3-month treasury bills after expiration. This interval investing approach gives great flexibility while waiting for a bear market (the average bear market lasts about one year).

If you have cash on the sidelines, you might want to follow suit. I’ll explain why the 3-month treasury is one of the best places to be on the yield curve. And after, I’ll give you some unique insight into expected long-term stock market returns based on current valuations.

Short-Term Interest Rates > Long-Term Interest Rates

Short-term interest rates have been climbing and the yield curve inverted last Friday. The 3-month treasury rate is now above the 10-year treasury rate… so who in their right mind would lock into 10 years of inflation-adjusted returns close to zero?

3-month treasury rates are higher than the 10-year treasury rates
SourceFederal Reserve Bank of St. Louis

For banks and insurance companies, the long-term risk-free bonds can still make sense… but for most investors, no way Jose. Through both my Schwab and Fidelity accounts, I bought 3-month treasury bills with no trading fees attached. And even better, the gains aren’t taxed at the state or local levels.

Short-term treasury bills offer greater yields and liquidity while waiting for better investment opportunities like equities. I’m a big fan of dividend stock for long-term investing and I hope to allocate over 90% of my total assets to stocks in the next three years.  Let’s take a look at the stock market’s current valuation and expected returns.

Bull Markets Don’t Die of Old Age

Stocks are at lofty valuations and the bull market is long in the tooth. This bull market has lasted over a decade and is the longest in U.S. history. Although, bull markets don’t die simply of old age.

With the long run-up, the S&P 500 PE ratio sits at 22 and that’s well above its average of 16. At this elevated level, I expect equities to return around a 4% annual return (cumulative annual growth rate) over the next decade. To see why, check out… Proof to Avoid Stocks When PE is High.

Instead, I’m waiting for a stock market correction and better buying opportunities. The economy is already starting to slow down as the Fed has pushed short-term interest rates higher. The yield inversion that I mentioned above is a strong indicator of bear markets. If we extended the same chart above back a few decades, past inversions show that recessions follow within a few years…

Yield Inversion 3-Month and 10-Year Treasury Rates
SourceFederal Reserve Bank of St. Louis

The yield inversion is just one of many signs pointing us towards a recession and an overvalued stock market. For example, home prices are above pre-crisis highs even after adjusting for inflation. Total student debt has almost tripled in the last decade to over $1.5 trillion. Stock market capitalization to U.S. GDP has climbed above 150% (one of Warren Buffett’s favorite metrics). And S&P 500 stock buybacks are at all-time highs as companies have leveraged up in the low-rate world… but cheap credit is running thin.

A market crash is coming just as a low-tide follows a high-tide. Although, trying to time it to the month and year is a fool’s game. That’s why I’m going to keep on rolling my 3-months treasury positions forward until equity risk-to-return is more favorable.

Invest mindfully,

Brian Kehm

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