A Comprehensive Guide: Boost Your Emergency Fund with Short-Dated US Treasuries

01 March 2024
Ronald Yim
Country Manager, Hong Kong

Discover how short-dated US treasuries can enhance your emergency fund. Learn about the advantages, risks, and how to leverage StashAway's USD Cash Yield portfolio for optimal results.

An emergency fund is a financial safety net designed to cover unexpected expenses or financial emergencies. It's a buffer against the unexpected, such as a job loss, illness, or major repair.

Reaching for your credit card or tapping into your retirement savings isn’t an emergency plan. It's a stash of money set aside to cover the financial surprises life throws your way.

So, how much should you save in your emergency fund? Financial experts generally recommend having enough money in your emergency fund to cover 3-6 months' worth of living expenses. This amount can give you enough time to, for example, find a new job if you lose your current one, without having to worry about your immediate financial obligations.

Where should you keep your emergency fund?

Hopefully you don’t have to tap into your emergency fund often, but you should be able to access your emergency fund easily.

Look to keep it in a high-liquidity account that earns enough interest to keep up with inflation, or in a low-risk investment that doesn’t have a lock-up period so you can withdraw the money whenever you need it.

Enhance your emergency fund with Short-Dated US Treasuries

Short-dated US Treasuries, often referred to as Treasury Bills (T-Bills), are short-term debt obligations and come with a maturity of one year or less. It is backed by the US Treasury Department, making them one of the safest investments available.

The only risk associated with T-Bills is the unlikely event of a US government default. Given the strength and stability of the US economy, this risk is considered negligible. As a result, T-Bills, especially those with maturities of less than three months, are often regarded as the "risk-free rate" by investment professionals.

Treasury Bills are sold at a discount and mature at face value. The difference between the purchase price and the face value is the yield.

Advantages of Incorporating Short-Dated US Treasuries into Your Emergency Fund

US Treasuries, often considered the gold standard of safe investments, offer several advantages when incorporated into an emergency fund.

  • Potential for Higher Returns: The yield of 3-month US Treasuries is currently above 5%, which is significantly higher than the interest rates offered by bank deposits.
  • Ultra-Low-Risk: US Treasuries are backed by the full faith and credit of the US government, which has never defaulted on its debt. This makes them an attractive option for individuals looking for a secure place to park their emergency funds.
  • Liquidity: These securities can be easily sold and converted into cash, making them highly liquid and accessible in case of an emergency. Additionally, no lock-up period is required, meaning you can access your funds whenever necessary.
  • Inflation Protection: Short-dated US Treasuries can provide a hedge against inflation, as their yields tend to rise with inflation expectations.
  • Minimal FX Risk: As the Hong Kong Dollar (HKD) is pegged to the US Dollar (USD), the FX risk associated with investing in short-dated US Treasuries is minimal. The peg reduces the potential impact of currency fluctuations on the value of your emergency fund.

Short-dated US Treasuries with maturities of 1 to 3 months have minimal interest rate risk due to their shorter duration, lower sensitivity to interest rate changes, and greater certainty of principal repayment. However, individual risk tolerance and investment objectives should still be considered before making any investment decisions.

How to invest in Short-Dated US Treasuries

When considering investing in short-term US Treasuries, there are three main options: purchasing through US stockbrokers, investing in mutual funds, or buying ETFs that track US Treasury rates.

Buying through stockbrokers requires more capital and may not be suitable for beginners. Mutual funds involve entrusting fund managers and may have additional fees. ETFs are a more accessible choice for beginners, with lower barriers, diverse options, and lower costs.

It is also essential to consider the impact of US withholding tax, especially for non-US investors. This tax is deducted from the dividends and interest earned from US investments, thereby affecting investment returns. The tax rate, usually set at 30%, may vary depending on the applicable tax treaties. As a result, the withheld tax reduces the income received, ultimately impacting the overall returns on the investment.

Introducing StashAway’s USD Cash Yield Portfolio

Having an emergency fund can provide peace of mind and financial stability when you need it most. With our USD Cash Yield portfolio, you’ll get exposure to Short-Dated US Treasuries with maturities between 0 – 3 months, which offers a convenient and secure way to boost the overall returns of your idle cash holdings.

The portfolio invests in an ETF that tracks 0-3 month US Treasuries rate. The latest yield of maturity is 5.3%* p.a.

It has no minimum or maximum balance requirements, no lock-up period, and ultra-low risk. Moreover, the ETF underlying USD Cash Yield portfolio is not subject to the US government's withholding taxes, as it is a UCITS-compliant ETF domiciled in Ireland with US bonds as the underlying assets. As such, this means that all dividends will be fully reinvested.

📱 In the app, select Flexible Portfolios > Start with a template portfolio > US Cash Yield

*The yield to maturity is provided by the ETF fund manager and is not a guarantee for future returns. The latest annualized yield is as of  2 February 2024, and may change depending on market conditions.

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