Nearly everyone holds some cash in their portfolio, either to invest later, pay upcoming expenses, or provide a counterbalance to riskier investments. Often, we are not exactly sure how and when we will spend or invest our cash, so want easy access regardless of market conditions. The basic choice is a 1-month Treasury bill, but really any Treasury instrument will do as they can be sold quickly if we need funds immediately.
Storing cash in Treasuries helps avoid credit or liquidity risk but may involve duration risk – if rates unexpectedly rise more than expected, then you could get back less than you invested. The main goal for reserves is liquidity, but there is a secondary goal of generating income to help mitigate the inflationary drag of holding cash.
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