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US T-Bills Are the New Savings Account

I think it is safe to say that we have seen almost everything over the past two years.  A terrible pandemic has not been seen since 1919, but the stock market declined, increased, and then declined again.  However, your savings account rate has remained constant throughout this brief history.  It was low before Covid, and it is still low today.  But why is it low if the Federal Reserve is increasing short-term interest rates?  Why aren’t Certificates of Deposit (CDs) paying more?  For these reasons, we will investigate why US Treasury Bills are the new savings account.

What is a US Treasury Bill?

A US Treasury Bill or T-Bill is a United States government debt obligation backed by the Treasury Department which matures under one year.  These bills are sold in denominations of $1,000.  T-Bills are one of the safest and most secure investments in the market.  You can purchase them from the federal government or through your investment company.  To do so, you need a brokerage account set up to purchase them.  Opening an account is easy and can be done in minutes.

Why is it a Good Time to Purchase?

T-Bills have not been in favor over the last 15 years because they did not pay a high-interest rate.  A year ago, the 3-month T-Bill paid .05% annually.  That is probably what you were receiving in your money market account.  Thus, they were not attractive.

Today a 3-Month T-Bill pays 3.7% annually.  There isn’t a savings account around where you can receive an equal interest rate.  Also, CDs pay less than the 3-Month T-Bill interest rate, but your money is tied up for 1-3 years.  If you wanted to purchase a 1 Year Treasury Bill, the interest rate, if held to maturity, is 4.3%.  Below is a list of annual T-Bill interest rates per their maturity.

Date   1 Mo  2 Mo  3 Mo  6 Mo  1 Yr
10/11/2022  3.1  3.4  3.7  4.0  4.3

What are the Pros and Cons of owning T-Bills? 

Pros:

 

Zero default risk since T-bills has a U.S. government guarantee.  The United States has never defaulted on its bond payments.  They are the safest investment in the world.  There should be no fear of them paying back their debt.

Interest income is exempt from state and local income taxes but subject to federal income taxes. For states that have an income tax, this is a nice feature.  The income made from the T-Bills is tax-free.  However, like a savings account and CD interest, it is taxable on the federal level.

Investors can buy and sell T-bills with ease in the secondary bond market.  You do not have to open an account with a specific brokerage company or with the US Treasury (like I-Bonds).  You can buy them at any investment company like Fidelity, Vanguard, E-Trade, Charles Schwab, etc.  Simply open an account online or call them.  After funding the account, you can buy the specific T-Bills that meet your maturity deadline or call them, and they will buy them for you.  Whether your savings goal is for a home down payment, vacation, or a wedding, T-Bills are paying a generous risk-free interest rate.

Cons:

 

The T-Bill pays no coupon—interest payments—leading up to its maturity.  Unlike a normal bond, you will not receive periodic payments for owning the bond.  This is called a zero coupon bond.  A CD pays you 100% of the interest at the end of the term.  A T-Bill pays you the interest upfront by not deducting the full amount of the T-Bill.  We will run through an example below.

T-bills can inhibit cash flow for investors who require steady income.  T-Bills might not be the best spot to park cash if you need cash immediately.  You will have to wait until the term of the T-Bill matures or sell it potentially at a loss before it matures.  Investing in T-Bills should be used for excess cash that is ready to be invested or spent in the future.

T-bills have interest rate risk, so their rate could become less attractive in a rising-rate environment.  Interest rate risk is the risk that the interest rates could increase; thus, your current T-Bill will not make as much interest as a future T-Bill.  Currently, the Fed is raising interest rates, so this could happen.  However, T-Bills are short in maturity, and the risk is only slight.

 

T-Bills are a beneficial investment for parked short-term cash that will be used for other purposes in the future.

How does a T-Bill Pay You

Let’s run through an example to show how you earn interest by investing in T-Bills.

Doug and Lauren have $50,000 in short-term cash reserves.  Doug and Lauren deposit $50,000 into their brokerage account at Fidelity.

Then, they invest the money in 6-month Treasury Bills. The par value of each Treasury Bill is $1,000, so they buy 50 of them.  The competitive market bid on each T-Bill is $990 per bill.  Thus, the bills cost $990 x 50 or $49,500.  $49,500 is deducted from their cash and invested in T-Bills.

Once the T-Bills mature in 6 months, Dan and Lauren get paid $50,000.  They earned $500 in 6 months or 4% annually.

To Conclude

T-Bills have increased in usefulness with the Federal Reserve raising short-term interest rates.  We have not seen rates this elevated since 2008.  T-Bills are a beneficial investment for parked short-term cash that will be used for other purposes in the future.  Treasury Bills are not a one size fits all investment.  Please consult with your trusted financial advisor to see if it meets your personal goals and needs.

 

About The Author

Jordan Benold, CFP® provides fee-only financial planning and investment management services in Frisco, TX.  Benold Financial Planning serves clients as fiduciaries and never earns a commission or sells a product.

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