T-bills not so bad compared with S&P

6-month treasuries' rate is more than twice what the stock index has earned over past five years

it also exceeds the pace of inflation

Your Money


You now can earn an annualized yield of 5.25 percent on a six-month U.S. Treasury bill, the most that security has paid in more than five years.

Can't get too excited about 5.25 percent? True, it's barely halfway to a double-digit return. But as Albert Einstein noted, everything's relative.

The T-bill rate is more than twice the 2.5 percent a year that the Standard & Poor's 500 stock index has earned over the past five years, including dividends.

A 5.25 percent return, compounded, would double your money in 13.6 years.

And if you're worried about beating inflation, a 5.25 percent yield is one full percentage point above the 4.2 percent jump in the Consumer Price Index over the past year.

Plenty of nasty things have been said about the Federal Reserve's credit-tightening campaign. But there is a positive: The Fed has lifted short-term interest rates to levels that make saving money in so-called cash accounts worthwhile again.

With the central bank's latest move - the quarter-point increase in its benchmark rate to 5.25 percent on Thursday - the Fed probably has assured that T-bill yields won't be going much lower anytime soon, and may yet go higher.

Interest rates on other cash accounts, such as money-market mutual funds and bank certificates of deposit, are likely to continue rising as well.

Which may give some people pause about putting money into stocks, bonds or other risky assets, if they have funds to invest. In a cash account, the risk of loss is virtually zero.

Yet anyone who knows the basic rules of investing can recite the standard line about cash: In the long run, it's going to pay you a lot less than stocks or bonds.

Historical market performance data would seem to bear that out. From 1926 through 2005, U.S. blue-chip stocks produced an average total return of 10.4 percent a year, according to data tracker Ibbotson Associates.

Long-term government bonds generated an average total return of 5.5 percent a year in that period.

Treasury bills, by contrast, earned 3.7 percent a year in that period, on average.

Yet there have been extended periods within that 80-year time frame when cash beat stocks and bonds.

From 1966 through 1979, for example, T-bills earned 6 percent a year, on average. That topped the 5.1 percent average annual return on blue-chip stocks in that period, and the 3.1 percent average annual return on long-term bonds.

Stock market bulls will scream "unfair" at using data from 1966 to 1979. That was a terrible time for investing, as inflation surged to double-digit levels.

Inflation is a problem once again, if you believe the Federal Reserve. But no one is suggesting it's going to be a double-digit problem.

Even if Fed policymakers were to hold short-term rates around current levels for the next few years - as they did from mid-1995 through mid-1998 - shouldn't stocks be able to beat a 5.25 percent average annual return?

The S&P 500, as noted above, has gained less than half that amount over the past five years. But many other stock sectors have done far better. The average foreign-stock mutual fund has risen 11.3 percent a year in that period, according to Lipper Inc. Small-company shares also have performed quite well.

What's more, it's precisely because U.S. blue-chip stocks have done so poorly over the past five years that their fans say the next five years are bound to be better.

But you won't persuade Bob Shiller.

In spring of 2000, the Yale University economics professor published his book, Irrational Exuberance, the central theme of which was that stocks were grossly overpriced. In the book, Shiller forecast that the S&P 500 index would post no net gain over the next 10 years.

More than halfway through the decade, he's on target: The S&P index still is 17 percent below its all-time high set in March 2000.

Tom Petruno writes for the Los Angeles Times.

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