posted: Mar. 6, 2006 @ 10:18p
Treasury bills are often a rate leader when compared to low minimum liquid deposit accounts. The rates from recent T-bill auctions are listed in the Quick Summary and can also be found on tbillsheet. Thanks to all the contributors who keep the Quick Summary and tbillsheet updated!
The tax equivalent APY can be significantly higher based on your state tax rate. (See quick summary.)
The minimum investment is $1000, in $1000 increments. The bill can be sold at anytime, but before maturity you'll get a market-based value and likely have to pay a fee when you sell. If you hold it to maturity, the value will be preserved and you'll get the stated interest. The interest will not fluctuate if you hold it to maturity. T- bills can be purchased directly from the government (through TreasuryDirect) or from many brokers. They are free to buy on TreasuryDirect and there are no fees if you keep them to maturity. If you sell them prior to maturity, TreasuryDirect charges a $45 fee per security.
I have limited first hand experience with T-bills. I live in a state tax free state and my time horizon for investments has generally become longer than 6 months during the existance of this thread. However, we have many contributors to this thread who have extensive T-bill experience.
Comparison to savings accounts:
- T-bills can be purchased and sold at any time
- Fairly low minimum ($1000), although there are many no-minimum savings accounts
- Unlike savings accounts with fluctuating interest, the interest is guaranteed for the term of the bill; however, there is no opportunity for the rate to rise when held to maturity. Should T-bill yields rise further, and you sell, you'll get a lower price for the bill than if rates had stayed the same (or fell). If market yields do fall, you can command a higher price if you sell.
- Currently, APY is comparable to high yield savings accounts with similarly low minimum. Tax equivalent APY (state and local tax free) may be higher than savings accounts, depending on your situation.
- Savings accounts are insured up to certain FDIC and NCUA limits; with Treasury securities, the sky is the limit.
Comparison to CDs:
- Guaranteed rate if held to maturity
- More liquid than a CD (typically CDs have interest loss if closed early, T-bills do not although seller fees apply and the selling price would be market-based with no guarantee of the principal)
- Easier to open/purchase than a CD
- APY is lower than the highest yield CDs available (5-6%). However, the liquidity makes it act more like a savings account with a guaranteed rate than a CD. Tax equivalent APY (state and local tax free) may be higher than comparable term CDs, depending on your situation.
- CDs are insured up to certain FDIC and NCUA limits; with Treasury securities, the sky is the limit.
- Interest income is exempt from state- and local income taxes.
- Interest income is subject to federal income tax.
Safety of Investment:
- Treasury bills, along with the other Treasury securities, are backed by the full faith and credit of the United States government, therefore there is no practical default risk so they can be considered extremely safe.
- In comparing to bank/credit union savings accounts and CDs, some members have expressed that they believe them to be equally safe, since FDIC/NCUA provide insurance up to a specific limit also backed by the full faith and credit of the US government. Other members expressed problems with government insured accounts during the S&L crisis.
- Treasury securities guarantee principal and interest. The possibility exists that an FDIC/NCUA account will receive principal but not interest on failed banks/credit unions. Also, there may be delays in recovering the principal, but FDIC is required to minimize these. Keep in mind that the guarantee for principal and interest on T-bills only extends when held to maturity. When selling on the market, you'll get neither guarantee of principal nor interest, so when considering selling the T-bill on the market, it may be said that an FDIC/NCUA account is safer.
Selling before maturity:
-Due to the selling fee, if you think you may have to sell before the bill matures, I recommend you buy it in the largest increments you're comfortable with since the seller fee is per security (in TreasuryDirect), independent of the amount.
-Since the time period is fairly short, you won't make or lose much money if you sell before maturity. These bills are good candidates to plan to keep to maturity, but can be sold if needed.
Some useful links:
Recent Treasury Bill Auction Results
Daily Treasury Yield Curve
FAQs: (partial list to be expanded over time)
1. What's a Treasury bill?
Treasury bills are short-term debt instruments issued by the U.S. Department of the Treasury on a weekly basis to finance the operation of the federal government. They are part of the series of marketable securities issued by the government including "bills" (<1 yr), "notes" (1yr-10 yr), and "bonds" (> 10yr). They are also part of what comprises the "money market" for short-term debt instruments.
2. How do Treasury bills work?
They are a form of zero-coupon bond. This means, you buy the T-bill at a purchase price that's a discount from face value, hold it for a specified period of time, and then receive the face value (purchase price + interest) back. They are sold in multiples of $1000. For instance, you might be buying bills for $975 and receive $1000 after 6 months, where the $25 difference is the "interest" you receive. It is the bill's discounted price that's determined at auction, and which will determine the rate you get. The Treasury will not redeem the bill before maturity, but you can sell it to the secondary market, which consists of buyers interested in buying already issued Treasury securities, usually for a different price than what you originally paid at the auction.
3. What terms are available?
The Treasury currently auctions 28 day, 91 day, and 182 day bills (often referred to 1 month, 3 month, 6 month bills). There are shorter term "cash management bills" which are not available to individual investors.
4. What are the important dates?
- Tentative auction calendar: published quarterly on the first Wednesday of February, May, August, and November.
- Annoucement date: when the announcement for a specific auction is made (a few days before the auction).
- Auction date: when the price and rate of the bills are set (usually Monday for 91 and 182 day, and Tuesday for 28 day bills); one has to request the purchase prior to the auction.
- Issue date: purchase price for the bill is due (usu. Thursdays of the auction week).
- Maturity date: when you'll receive the purchase price plus interest back.
- End of original issue holding period: when you may sell or transfer a bill out of TreasuryDirect (45 days from issue, or the maturity date for 28 day bills).
5. How are T-bills taxed? When is interest considered to be paid?
T-bills are state/local tax free, but the interest is federally taxable as ordinary interest income (1099-INT). Interest for T-bills is considered to be paid at maturity, creating a tax event only at maturity (as opposed to savings accounts and CDs which credit interest in regular intervals, and T-notes and T-bonds which pay interest semiannually). If your bill matures in the next calendar year, you'll only owe tax in that next year. If you sell your bill or modify the registration (ownership) you may create a tax event before maturity.
6. What's a Treasury bill's investment rate? What's the discount rate? How do I compare it to bank deposit accounts?
What's called the "investment rate" is effectively what would be reported as APR for bank accounts. The discount rate, determined by the bank discount method, is an interest rate calculation method used since before everyone had computers and calculators. It makes several assumptions that make it appear lower than APR. It's in standard use for money market instruments and therefore most approporiately compared to other money market instruments such as commercial paper. (not to be confused with MMA accounts) Comparison to bank deposit accounts is most easily facilitated by calculating an APY as discussed next.
7. What do you mean by a Treasury bill's APY?
We calculate APY for two reasons: (1) to compare to bank savings and CD accounts that commonly list their rates in APY, and (2) to show that the return of reinvested T-bills is higher than just their blended APRs. The APY assumes the principal and proceeds are reinvested at the same rate in the future. It follows that the APY will not tell you exactly the return you can expect after a year, since T-bill rates are by definition guaranteed for less than a year. But, neither are the rates of savings accounts and short term CDs! Think about it and let us know if you disagree with the concept ... (for exact calculation see quick summary)
8. OK, so then what is a Treasury bill's tax equivalent APY?
(You may want to skip this question if you're in a state without state/local income tax.) The tax equivalent rate recognizes that the T-bill is state/local tax free, and savings and CD accounts are not. Therefore, you'll have a higher return on a T-bill with the same APY as you'd have with a savings account or CD. It does not mean you actually get a higher return THAN the APY, it means that this is the APY a savings account or CD (or other state/local taxable investment) would have to have, in order to beat the return of the T-bill. The tax equivalent APY depends on three factors: (1) your marginal state and local rate, (2) your federal rate, (3) whether or not you itemize. (for exact calculation see quick summary)
9. How are the purchase price and the investment rate (APR) related?
If you consider the purchase price as the "principal" of the investment and the difference between face value and purchase price the "interest," if you calculate (interest/principal)*(365/days of bill) you get the APR. The Treasury does this calculation for us to 1/1000 basis point, however the price is actually more accurate to 1/1000 of a cent for a $1000 bill.
10. How do I know the rate I'll be getting if I put money into this in advance?
You don't! It's part of the fun and excitement of T-bill investing. Get used to it. T-bills are auctioned and you'll most likely be a non-competitive bidder, which means you're willing to accept whatever rate is determined at the auction. The auction system enables that the rates are determined efficiently by market forces, corresponding to whatever the current economic outlook is. It also makes for a fun game usually every Monday and Tuesday 1 PM ET to be the first to post the auction rates, and there will be rate speculation and forecasts discussed at the end of the week in this thead. Arguably, it's one step closer to the real action than savings and CD rates, which are set by banks according to their deposit needs at the time. (This could be good or bad ... you'll never see a "T-bill special" advertised.) If you MUST know your rate, you could buy an already issued T-bill on the secondary bond market through a broker for the prevailing yield to maturity, although be prepared for fees/spreads on the rate to be involved.
11. Can I bid competitively in the auction?
Competitive bidding means you set the minimum rate you're willing to accept, or your order will not be filled. The typical methods by which an individual would purchase T-bills only allow non-competitive bidding. For competitive bidding, you'd have to bid using the "Commercial Book Entry System" which is limited to institutional investors. If you find a way, let us know!
12. I think I'm ready to invest in T-bills. Where can I buy them?
There are three common methods to purchase T-bills: (1) directly from the Treasury through TreasuryDirect (TD), (2) directly from the Treasury through Legacy TD, or (3) from a broker. Each of them have their unique advantages or disadvantages. TD is a fully online system (for better or worse), and Legacy TD is an online/phone/paper based system. If you're a savings bond investor you may already have a TD account.
13. Are there any fees involved?
There are no fees in TD for T-bills held to maturity, and no account maintenance fees. Similarly, no rates for T-bills held in Legacy TD although an annual fee does apply for > $100k account balance. When buying from a broker, make sure they charge no fees for T-bills bought at auction and pass the full auction rate along to you. Although no recommedation is given, Fidelity has been verified by multiple posters as charging no fees and giving the full rate.
14. Can I *really* sell the bill right away after I buy it?
Yes but no. It depends. T-bills are fundamentally some of the most liquid instruments available in the market. However, if you choose to use TD for buying the bills, a 45-day hold (or 28-day hold) applies during which you cannot sell the bill. (This is for the Treasury to make sure you're good for the money.) The hold does not apply to Legacy TD. Any hold that your broker imposes would be per their own policy.
15. I opened an account with TD, but I'm not able to transfer money or buy T-bills.
Check in the account info tab if you have a T08 hold. If that's the case, you need to send TD a certified account authorization form first. The authorization form can be certified by any FDIC insured financial institution. Note that previously, the hold only applied to transferring money back out of TD. Now, it applies also to money transferred in and purchases of securities. The form is linked in the quick summary.
16. Can I link TD to any checking or savings account for my T-bill purchase?
Ideally yes, but so far we've had one exception reported: Amboy Direct Savings link will not work. If the link does not work because of an R20 code (non transaction account), your purchase will be cancelled. If you don't have sufficient funds, we suspect your purchase will go through and TD will try to pull the money again at a later time. We recommend you transfer a few dollars into a C of I to test out the link, if you don't want to be surprised when you want to buy T-bills. Or buy yourself a $25 EE or I bond through TD.
17. What are cash management bills and how can I buy them?
The shortest term of T-bills (usually between 1-2 week terms) are called "cash management bills." They are auctioned infrequently and in irregular intervals, and their purpose is to give the Treasury some short term cash as the need arises. Their investment rate is usually close to the fed funds rate. Depending on current rate expectations for the future (i.e. if rate increases or rate cuts are expected), these can sometimes produce the highest yields of currently auctioned T-bills (of course only for a short duration). They are not sold through TD or Legacy TD, but only through the commercial book entry system. Individuals can participate through brokers, although Citibank Private Bank is the only confirmed broker who offers cash management bills to its clients. The overall gain from seeking to invest in these rather than other T-bills is quite small.