When it comes to optimizing T-Bill investment strategies, our dedicated quantitative investment team at Treasure has invested significant time and effort. In this article, we delve into various T-Bill investment approaches and shed light on the pitfalls of chasing the highest T-Bill yield.
Exploring Effective T-Bill Investment Strategies
Cash Managers often adopt standardized allocations, commonly known as "T-Bill ladders," to invest in Treasury Bills. In this context, we'll explore two popular strategies: the "Equal Weighted ladder" involving equal investments across 1-, 3-, 6-, and 12-month tenors with monthly rolling, and the "Buy and Hold ladder" with equal investments across the same tenors held until maturity.
For startup clients, particularly early-stage businesses, striking the right balance between yield and liquidity is crucial. We'll also delve into the challenges of pursuing a "Maximum Yield" strategy, where the T-Bill with the highest yield is allocated to.
To provide a benchmark for comparison, we introduce the "Perfect Foresight" model. While not practically achievable, this model involves selecting the T-Bill with the highest realized return each month, based on historical data.
Analyzing T-Bill Investment Performance
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Figure 2 visually depicts the cumulative performance of different T-Bill investment strategies, highlighting the significant underperformance of the "Maximum Yield" strategy in 2022.
Understanding the Shortcomings of Maximum Yield Strategies
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By examining Figure 3, we uncover the substantial maximum drawdown of 190 basis points associated with the "Maximum Yield" strategy, revealing its vulnerability.
Figure 4 offers insights into the comparative annualized returns of various strategies, emphasizing the lagging performance of the "Maximum Yield" approach in specific years and its sharp decline in 2022.
We can see that the actual maximum yield occurred at the 12-month tenor each of those six months. Employing the Maximum Yield strategy (buying the 12-month bill, holding it for one month, and then rolling it back into the latest 12-month) was a suboptimal strategy over those two quarters.
The yield at 12-months increased over 2% during that time period. Prices move inversely to yields this resulted in the massive drawdown we saw in Figure 3. Moreover, 11 out of 12 tenors lost money every period if bought and rolled on a monthly basis.
The only exception here is the 1-month bill. All things equal, longer maturity bonds lose more value when rates rise. With perfect foresight we would have known that the optimal trade over this time period would have been to simply buy and roll the 1-month. This would have generated a guaranteed return stream with zero drawdown.
Key Takeaway: Sensitivity to Yield Curve in T-Bill Investments
This analysis underscores the significance of considering yield curve sensitivity, especially for longer-maturity bonds. The relative resilience of the 1-month bill highlights the importance of dynamic strategy adjustments.
Introducing the Optimized T-Bill Investment Strategy
Concluding our study, the Treasure Investment Team presents the "Managed Treasuries" strategy. This approach aims to strike a balance between the "Buy and Hold" and "Perfect Foresight" models, offering an improved performance trajectory.
In the realm of T-Bill investments, the quest for maximum yield can yield counterproductive results. Understanding the impact of yield curve shifts and implementing a strategic approach like "Managed Treasuries" ensures a more robust and reliable path to optimizing T-Bill investments.
