It’s no secret that Warren Buffett, the billionaire CEO of Berkshire Hathaway, loves treasury bills, also known as T-bills. While he could invest Berkshire Hathaway’s massive cash hoard of over $100 billion in nearly anything, for the time being, he’s sticking with T-bills.
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As he told CNBC in Aug. 2023, “Berkshire bought $10 billion in U.S. Treasurys last Monday. We bought $10 billion in Treasurys this Monday. And the only question for next Monday is whether we will buy $10 billion in 3-month or 6-month” T-bills.
So, why is the most famous investor in the world so in love with treasury bills? Here’s a look at how T-bills work, what Buffett likes about them, and whether or not you should follow suit with your own money.
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What Exactly Are Treasury Bills?
Treasury bills are short-term securities issued by the U.S. government. They are backed by the full faith and credit of the U.S. government and are considered among the safest investments in the world.
Treasury bills are issued in maturities ranging from 4 weeks to 52 weeks, and they are priced at a discount. They rise in value until they pay their entire face value at maturity. For example, you might buy a Treasury bill for $950 and receive $1,000 when the bill matures, earning a $50 return.
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How You Can Buy Treasury Bills
While you can buy T-bills from a broker, some will charge you a fee to do so. Others may offer T-bills for no commissions or fees whatsoever, so you may have to shop around. However, you can always buy treasury bills directly from the U.S. government at TreasuryDirect.gov.
The minimum purchase amount is just $100, and you can buy in increments of $100 all the way up to $10 million, if you’re submitting what’s known as a “non-competitive bid.” This is the standard way for most investors to buy T-bills, as you’ll just receive the interest rate determined at the regular U.S. Treasury auction.
The Return on a Treasury Bill
The return on a treasury bill is determined at auction on a regular basis — 52-week bills are auctioned every four weeks, while 4-, 8-, 13-, 17- and 26-week bills are auctioned weekly.
Generally, T-bill returns are fairly low, as they are considered ultra-safe, conservative investments. However, over the past two years, as the Fed has conducted an interest-hike campaign to tame inflation, T-bill rates have risen sharply. As of Jan. 25, 2024, yields for 3-, 6- and 12-month T-bills were 5.36%, 5.21% and 4.76%, respectively.
Note that interest on treasury bills is not taxable at the state or local level, so the final effective yield can be higher in certain states.
Why Buffett Loves Treasury Bills
In 2022, Buffett’s Berkshire Hathaway held a whopping $126 billion in U.S. Treasury bills. Buffett reportedly prefers T-bills to other options because he never wants to worry about whether or not Berkshire’s pile of cash is safely invested.
Meanwhile, yields have jumped so much in the past two years that Berkshire is actually earning a pretty penny on this cash hoard. If that $126 billion is invested at a 5% yield, Berkshire is generating an incredible $6.3 billion in interest per year. That safely earned income certainly contributes to Buffett’s continuing faith in T-bills.
Are Treasury Bills Right for You?
If you’re looking for an investment that will allow you to sleep at night, treasury bills might be the answer. Because they are backed by the full faith and credit of the U.S. government, they are popular the world over as a safe investment. Furthermore, with yields on some T-bills still remaining well above 5%, you can generate a decent amount of income for little-to-no risk. However, even at a 5% yield, T-bills aren’t a great solution for long-term returns.
Imagine, for example, that you’re socking away $500 per month for your retirement 30 years down the road. If you were to continually roll over 5% T-bills, you’d end up with a nest egg of about $416,000. But if you instead earned a 10% annual return on that money, which approximates the long-term return of the stock market, you’d end up with over $1.1 million.
Something else to factor in is that T-bill yields are likely to fall over the next year or two. The reason is that the Fed boosted interest rates to their highest levels in 22 years in 2023, and they have already announced their intention to cut them in 2024.
When the Fed cuts rates, T-bill yields fall as well, meaning you won’t likely earn a 5% yield from them in the coming years — or perhaps decades. Lower yields will make it even more difficult to rely on treasury bills to build your retirement nest egg.
The bottom line is that T-bills can be a great option for your short-term savings, such as money you’re saving for a down payment on a house. However, they’re not a long-term investment product. Berkshire Hathaway’s $100-billion-plus position in T-bills is simply Buffett’s way to earn the most money possible for the company while he looks for other long-term investments.
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This article originally appeared on GOBankingRates.com: Warren Buffett Loves Treasury Bills — Should You?
