The Treasury Bill Risk Premium: Why T-Bills Are About as Risky as Stocks in the Long Term

Abstract

These days it’s become convention (reinforced by the media’s treatment of wealth) to assess our net worth by tallying up the market value of our financial assets, even though it’s more natural and useful to think of our wealth as a stream of dollars over time given the nature of our income and spending. Once we entertain the idea that what we really care about is the long-term, inflation-adjusted purchasing power of our financial assets (what we’ll call the Real Annuity Value of our wealth), we’ll need to make some big changes to how we save and invest. Most significantly, we’ll have to abandon the notion that T-bills and other cash proxies, such as money market funds and bank deposits, are the lowest-risk assets we can own. While it’s true that the nominal value of T-bills doesn’t go up or down much day to day, we’ll see them as dramatically more risky once we focus on their Real Annuity Value.