How to Get Rich from Treasury Bonds

Get your bonds today, or so the song went during World War II.  While the average investor might think that bonds are you turn to preserve capital, the reality is that global markets are in the midst of one the longest bull markets in the history of capital markets.  That’s right, bonds are on a winning streak and while some will question the run-up in debt levels, the underlying truth is that you can get rich from Treasury Bonds.

How long has the party gone on in bonds?  According to some sources, it has been nearly 30 years.  That’s right, the bond market has persevered through the savings and loan bubble in the 1980’s, the dotcom bubble in the 1990’s, the subprime crisis, and even three (well probably four) rounds of quantitative easing.

While you probably know this, bonds work inverse to other equity classes.  That is prices fall as the yield goes up.  What is the reason for this? Well it is the risk and whole professional bond traders can make their careers on picking less than investment-grade bonds, most day traders will want to stick to safer bonds, such as U.S. Treasuries.

Here’s why.  Even with the dysfunction and political bickering in Washington, the U.S. government’s credit rating is largely considered to be rock solid by ratings agencies.  A perfect example of this is the deal that the self-described ‘King of Debt’, Donald Trump agreed to with Democrats to extend the debt ceiling by three months.

Now, the debt ceiling doesn’t directly increase the debt.  Instead, it is a bureaucratic tool which gives the Government to pay for the debt it has already incurred.  Sounds idiotic?  Well it is.

Think about it in this way – your trust fund buddy from college spends $10,000 at the bar and needs to ask the fund manager for an additional allowance this month.  While the way he spent the money was wasteful, he has already incurred the expenses.  As such, he needs to make sure there is enough money in his bank account to pay the bar owner.Granted this isn’t a perfect analogy, but you get the point.

This brings us back to the debt ceiling agreement as the key point is that the government continues to service its debts.  If this continues, U.S. Government bonds will remain highly rated and investors will continue buying them.

But now you are asking, how does this bond 101 lesson help me to get rich?  Treasury bills not only offer investors a modicum of stability, they are also incredibly liquid – so much so that you easily use the underlying bonds as collateral.

This can be helpful if you are looking for an investment instrument to leverage for debt finance.  One method commonly used in corporate finance is to purchase what are known as ‘bullets’.

These are zero-coupon treasury bills and they basically trade at half of the face value.  As such they are a great liquidity injection if you are seeking to increase the loan-to-value ratio of a lump sum loan.  This method is commonly used in project finance as it can reduce risk (i.e. lower the interest rate) and help you to get more money.  In this way 1 + 1 = 5 as the returns from your project could turn you into a centimillionaire.

Then there are the tax benefits of treasury bills.  While these aren’t as attractive as some municipal bonds, most T-bills are exempt from taxes at the state and local level and if most of your income is from investing then this is a great strategy to lower your overall tax burden…

Why is NOW the Right Time for T-Bills?

For starters, interest rates are starting to go up.  While this hasn’t impacted the ‘yield curve’ yet this is largely due to the continue interest in Treasury Bills – especially as governments are currently offering bonds a negative interest rates.

The prices have remained somewhat stable over the past year – even as yields continue to move closer to their 5-year highs.  As such, the rate moves by the Federal Reserve have done little to slow the market and this makes allocating at least part of your portfolio to bonds a smart move.

Another advantage that Treasuries offer is the nearly constant demand.  While the Government auctions off new bonds every week, the secondary market for these instruments is quite robust and depending on your confidence level as an investor, there are also a number of Synthetic T-Bill products that you can leverage for returns.  While these instruments are not for the faint of heart, the payouts can be sizable – if you know what you are doing.

Examples of Synthetic T-Bills include default insurance or even a bond index fund.  However, the two instruments are not the same and you want to make sure you fully understand how they work before you park your money in either.

Don’t Take My Word For It

There is a reason why bond traders are often considered the smartest people on Wall Street and if you are considering a deep dive into the bond market, then you will want to make sure you are getting right advice.

Don’t take my word for it, as I am not advocating that you purchase any bond product.  Instead, getting rich starts by knowing the market and how it works.  Then you can figure out which positions will deliver the alpha you are seeking.