Coming in at an annual yield of over 3%, the 6 month Treasury Bill is starting to look quite tempting. I bought my first batch from Treasury Direct this week and plan to buy more at the beginning of each month. Many people like dividend stocks and the cash flow they generate. However, dividend stocks aren’t bonds, they come with equity risks.
Meanwhile, there are risk-free things like I-bonds generating over a 9% yield. In addition, the 26 week or 6 month treasury bill is generating a 3.22% annual yield. Maybe you are saving for a home or a larger cash purchase in the next year? These make a good option to consider over your standard checking or savings accounts.
The 13 week Treasury Bill
Treasury Bill Durations:
Treasury Bills come in a variety of durations and can be matched to your own time horizon.
- 4 week (1 month)
- 13 week (3 month)
- 26 week (6 month)
- 52 week (1 year)
As of 8-26-22, the yields for Treasury Bills are the following:
52 week 3.37%
6 month 3.22%
3 month 2.84%.
I feel like the 26 week T-bill is the sweet spot along the curve where you are getting paid a decent yield for the duration you hold. Committing to an additional 6 months is only worth a .14% improvement in yield. Six months isn’t huge time commitment, whereas a year could be depending on when you need the money.
Where to Buy Treasury Bills
You can buy T-bills at the Treasury Direct website or from your brokerage like Fidelity, Vanguard, Charles Schwab.
T-bills are sold at a discount to face value. The difference in the two is the interest you get when you hold them to maturity. The advantage of buying through a broker is you can purchase on the secondary market and sell them if you decide to cash out before maturity. Through the Treasury Direct website, you can’t purchase on the secondary market. In order to sell before maturity, the bills must be transferred elsewhere.
I purchased my T-bills through the Treasury Direct website but only because I’m 100% sure I will not cash them out before the six-month period.
Pros of Treasury Bills
- Guaranteed return
- Essentially risk-free
- State tax free
- No transaction fees or expense ratios
- Greater interest rate than checking or savings account
- Highly liquid
When you buy a T-bill, you are guaranteed to get your money back if you hold it to maturity. There is no risk of you losing your money.
Treasuries are backed by the United States Government. Unless the US defaults on its debt and we have all out chaos, there is no risk with a T-bill.
The interest paid on Treasury Bills is subject to Federal Tax but not state taxes. Disclaimer-I am not a tax advisor or professional, I’m merely parroting what I’ve read :)….Please consult your accountant
No Transaction Fees
There are no fees to purchase T-bills through the Treasury Direct website. With ETFs and stocks you have a spread, you will not see that if you choose to buy through treasurydirect.com.
Higher Interest Rates than Checking or Savings accounts
Right now, the 6 month T-bill is paying more than checking and savings accounts. For example, my credit union is paying 1.5%; this is over twice as much and it doesn’t take out state taxes. I’ve seen a one year CD paying more; however, keep in mind you will pay state taxes on interest from CD’s. This is where your state’s taxes come into a big play.
Treasuries are one of the most liquid investments. You can sell them quickly if you’d like. However, if you do choose to sell them before maturity, there is a chance you could lose money (depending on the rates).
Cons of Treasury Bills
- Opportunity costs of potentially missing out on larger equity gains
- Loss of purchasing power
- You only get interest at maturity
- If you purchase through Treasury Direct, the website is antiquated
There is a possibility that any cash you put into a Treasury bill would have gotten much larger gains in equities. Of course, the opposite is true as well; it’s true you kept yourself from taking large losses. At the same time, if your goal is to hold the money short-term for a larger purchase, you can’t risk losing your principal here.
Loss of Purchasing Power
One of the major risks with bonds is inflation. By holding a bond paying only 3.2% when inflation is over 9%, you are losing purchasing power. A few thoughts-while this is true long-term. The 9.62% inflation we currently have is an annual number and also doesn’t represent an individual’s own inflation number. For example, I don’t really drive much as I work from home. The price of gas has barely affected me directly (more so indirectly via groceries). One can navigate SOME inflation issues by changing buying and spending habits. The less eggs you buy now, the better, haha.
Interest is gained at Maturity
Unlike a checking or savings account, you won’t accrue interest every month. You only get your interest when the bond comes to maturity. In this case, at the end of six months, the interest is deposited into your linked bank account.
Treasury Direct website
Interacting with the Treasury Direct website is not fun. However, once you do it a few times, it becomes less of a hassle. Just don’t push the back button nor change your bank account info and you’ll be fine. On the other hand, this problem can be solved by purchasing through your broker.
Treasury Bill Ladder
One of the best ways to combat the risk of having your money tied up in T-bills and needing it is to create a ladder. This is also a good way to reduce interest rate risks (if interest rates rise sharply and you feel stuck at a lower rate).
Basically, what you do is purchase T-bills in cycles. Then, every time an old one is coming to maturity, a new one is a month behind maturity. I plan on purchasing a new 6 month T-bill every month. I will then have a ladder of T-bills coming due every single month. If for some crazy reason I need the money sooner than a year, I won’t be affected. This is the same tactic I’m using with I-bonds.
Conveniently, at both Treasury Direct and Fidelity, you have the option to auto-enroll. Once your T-bill comes to maturity, you can fix it to where it automatically buys a new 6 month T-bill. I’m not sure about Fidelity; however, at Treasury Direct, it will only do this for up to two years.
When do T-bills make Sense for an Investor?
1)If you are saving money for a house downpayment, a short-term T-bill could make sense for you. You are guaranteed not to lose your money and know exactly when you’ll get it back. You simply need to make sure that having it tied up for six months is okay (however, that can be solved using the ladder described above). If all else fails, you could transfer the T-bill to your brokerage and sell it on the secondary market.
2)You’ve maxed out your yearly I-bonds. It makes sense to max out your I-bonds before throwing money at T-bills, unless you need the money in less than a year. I-bonds are paying 9.62% vs over 3% for the 6 month T-bill. You’d be earning 3X as much percentage wise with i-bonds. I would get my I-bonds juiced up first.
3)Perhaps you’re in retirement and you are done with the accumulation phase. Now you just need safe income to live off of and you have a pretty hefty sum in your accounts. 3.22% is not a high yield (rates could move higher). However, some people have amassed so much wealth that 3.22% could generate a decent amount of income for them.
–Wishing you the best on the Investment Journey