Berkshire Hathaway had their annual meeting yesterday, and Warren Buffett disclosed that the company may have upwards of $200 billion in cash at the end of Q2. He also mentioned using 3- and 6-month Treasuries. T-bills and short dated government bonds are the best way to manage large cash positions like that of Berkshire due to the security of principal and liquidity, but it can be a great strategy for individuals as well. Everyone needs quick access to cash or credit to pay for everyday expenses like food and for unexpected expenses like car or home maintenance. Traditionally, checking accounts and physical cash were used to cover the need for immediate payments, but credit cards and apps like Venmo now represent a large portion of transactions thanks to their ease of use. With cash yielding no interest and checking accounts at major banks like Chase still yielding below 1% in a higher inflation environment, holding cash in Treasuries and paying for transactions with a credit card makes a lot of sense.
Consider a resident of Colorado who has an unexpected car maintenance bill of $1,000. They can either pay with cash/check and be out that money or they can pay with a credit card. Assuming they have a 2% back card, like the Fidelity card, they will get $20 back just by using the card. If the transaction occurs at the beginning of a billing cycle, the card holder may have almost 2 months before the balance would need to be paid. A 2-month T-bill was recently yielding a coupon-equivalent rate of 5.4%, which would provide ~$9 in interest on $1,000. In this scenario, the use of Treasuries as an emergency fund yielded almost 3% savings relative to a checking account.
Certificates of deposit are also a common way to gain a higher yield on short-term savings, but there are many drawbacks relative to Treasuries. CDs are subject to FDIC insurance limits and they are subject to penalties for early withdrawal. CD interest is also taxable at the state level, unlike Treasuries. For example, Colorado has a state income tax of 4.4%, making the Treasuries yielding 5.4% equivalent to a certificate of deposit yielding 5.625%.
I purchase T-bills through my brokerage account to manage most of my cash. In addition to the advantages mentioned above, I can quickly liquidate the holdings to generate cash for stock purchases if an interesting opportunity presents itself. I prefer to hold Treasuries directly since I can hold to maturity, avoiding the risk that Treasury funds might have to sell holdings at a loss in the event of a wave of redemption requests.
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