Buy “risk free” US treasuries TODAY to “beat” your own mortgage!

This is an interesting twist on our usual Float My Mortgage investment ideas. As of the last few days you can buy 30 year government bonds with a higher rate of interest than any recently refinanced 30 year fixed mortgage! If you have recently refinanced a mortgage in between Nov 2012 and March 2013, you could consider buying US government treasury bonds rather than “paying down” the mortgage directly. For example buying 30 year treasury bonds yields 3.56% (on Jun 24th 2013) and if you have a 30 year mortgage refinanced in March 2013 at 3.4% – you would get paid 0.16% for 30 years. Here the 0.16% is just difference between the 30 year treasury bond interest rate and your 30 year fixed mortgage interest rate. Not much, but it is potentially better than the lost opportunity cost for immediate prepayment. If you re-invested the 30 year treasury interest payments (with compound interest), this could be used as a lump sum to payoff a larger part of your mortgage in a few years time.

You can keep “risk free”* USD treasuries on your personal balance sheet as assets versus “paying down” the cash into the mortgage. *(here “risk free” assumes US government doesn’t default, in which case there would likely be larger issues to worry about!)

Also this could get better over the next few months, if 30 year treasury rates could continue to rise. If rates go higher there is a possibility that the % yield on the 20yr treasury (or maybe even the 10yr treasury) could “beat” your own mortgage %. If so it would worth be waiting for rates to go up and ladder in slowly over the next year or two.

Predicting rate direction and speed of rate increases is notoriously difficult (otherwise we’d all be rich!). However  if US treasury rates do go up over the next 18 months, at some point getting (maybe) 0.5% to 1% in treasuries “risk free” over your mortgage  is potentially possible. According to the CME group interest rate predictions there is about a 50%/50% chance of a FED funds rate rise by this about time next year (select “July 2014″)

Anyway this is an interesting idea that hasn’t been possible for the last few years due to ultra low US government bond rates.