Should You be Investing in Treasury Bills?
Treasury bills, or T-bills, are short-term government securities with a maturity of less than one year. They are issued by the United States Treasury Department and are considered one of the safest investment options available. As Federal Interest rates rise, you may be able to get almost 5x more interest payments for keeping your savings in T-bills as opposed to your bank’s savings account. Even when compared to CDs from other high-yield savings accounts, T-bills will offer slightly higher interest rates and the benefit of not having to pay state taxes on the interest earned.
In this article, we will discuss why investors might choose to invest in T-bills, the interest rates they offer, the benefits they have over Certificates of Deposit (CDs), and how to buy T-bills. Here’s how this article is broken down:
- Why invest in treasury bills
- The interest rate of treasury bills and how it’s paid
- T-bills vs. Certificates of Deposit
- Cons of T-bills
- How to buy T-bills.
- Conclusions and some considerations
Why Invest in Treasury Bills?
There are several reasons why investors might choose to invest in T-bills.
- They are considered to be one of the safest investments available, as they are backed by the full faith and credit of the United States government; if you hold these until maturity, you cannot lose money unless the US government defaults on its debt.
- They are highly liquid, meaning that they can be easily bought and sold on the secondary market.
- They are exempt from state and local taxes, making them particularly attractive to investors in high-tax states such as California
- They offer higher interest rates that CDs or high-yield savings accounts. As of writing, a 17-week T-bill offers a 5% interest rate whereas a 12-month CD from Marcus has an interest rate of 4.75% (before factoring in taxes)
The Amount of Interest Rate Treasury Bills Return
The interest rate that T-bills return varies depending on the prevailing market rates at the time of issuance. T-bills are issued at a discounted or reduced price to their face value, which means that investors pay less than the value of the bill at the time of purchase. The difference between the purchase price and the face value of the bill is the interest that the investor earns when the bill matures.
For example, if a T-bill with a face value of $10,000 is issued at a discount price of $9,500 and has a maturity of 52 weeks, the investor would earn $500 when the bill matures in 52 weeks. This equates to an annualized interest rate of approximately 5%.
It’s important to note that the interest rates advertised for T-bills are “annualized”, meaning that if you buy a 4-week T-bill that has a 5% annualized interest rate, you will only get 0.375% in 4 weeks.
The Benefit of Treasury Bills over Certificates of Deposit
One of the main benefits of T-bills over CDs is their liquidity. While CDs typically have a fixed term, often ranging from a few months to several years, T-bills can be bought and sold on the secondary market at any time. This makes them a more flexible investment option for investors who may need to access their funds before the maturity date.
In addition, T-bills are exempt from state and local taxes, whereas the interest earned on CDs is subject to these taxes. This can make T-bills a more attractive investment option for investors in high-tax states.
For example, if you have to pay an effective 7% state taxes in income on interest earned, a 5% state-tax-free T-bill is effectively equivalent to a 5.4% interest earned on a CD where you have to pay state taxes.
Cons of T-bills
The main downside of T-bills is the time limitation of tying up your money. If you buy a 17-week T-bill, you won’t be able to access that money quickly in case of an emergency. If you really need to get the money back before the maturity of the T-bill, you will have to go through the hassle of selling the T-bill in secondary markets. If you feel like you may need your money soon because of a sudden expense, the high-yield savings account with no time limitations may be a better option.
Finally, it’s important to understand the T-bills may not provide the best returns if we look holistically into stocks, corporate bonds, REITs (real-estate investment trusts), and municipal bonds. It’s important to understand the tradeoffs of one investment over the other and make the right choice for your situation.
How to Buy Treasury Bills
Individual investors can purchase T-bills directly from the Treasury Department through its website, TreasuryDirect.gov. To open an account, investors must have a valid social security number or taxpayer identification number, a U.S. bank account, and a valid email address. Once the account is set up, investors can purchase T-bills through an online system.
Alternatively, investors can purchase T-bills through a broker or dealer in the secondary market. However, investors should be aware that the price of T-bills on the secondary market can be affected by market conditions and may not reflect the actual yield to maturity.
Conclusion
In conclusion, T-bills are a safe and flexible investment option that can provide a competitive rate of return. While they may not be suitable for everyone, they are worth considering as part of a diversified investment portfolio for those looking to earn a return on their idle cash.