With the recent hikes in interest rates resulting in higher yields on savings accounts, finding the best account to park cash has real value. We typically focus on traditional FDIC-insured high yield savings accounts or CDs, and we’ve also explored alternatives like I Bonds, EE Bonds, Brokered CDs, CD Annuities, and Bond Funds.
Today, let’s take a look at buying U.S. Treasuries as an alternative to a traditional bank CD or savings account. I’m sure many of you are familiar with the information contained below, this write up is a novice guide for those who aren’t.
For future article context: this was originally posted on 11/11/22 when the best yielding savings accounts are earning in the 3.50%-4.00% range.
U.S. Treasury Bills
Find updated Treasury rates at this link or this link (sort by month or year; look for the “COUPON EQUIVALENT” rate to know your APY)
The U.S. sells bonds which are backed by the full faith and credit are the U.S. government, similar to secure FDIC-insured bank accounts. Treasury Bills, or T-Bills, is the name for their short-term bond sales of 4-week, 8-week, 13-week, 17-week, 26-week, or 52-week bonds. Longer term bonds of 2-10 years or 20-30 years are called Treasury Notes and Treasury Bonds, respectively.
Buying a 4-week T-Bill is like having a CD which is locked for 28 days. Buying a 52-week treasury is like buying a one-year CD. It does work slightly differently, however. Instead of paying ‘interest’, the feds will discount your ‘coupon’ which effectively gives you interest. For example, you might buy a $100 52-week T-Bill for $96. You pay in $96 now and after 52 weeks you’ll get back $100. That’s equivalent to putting $96 in a bank account which earns 4.10% APY (compounded daily) which would get you back around $100 after 52 weeks.
U.S. Treasuries can be purchased directly from the government site Treasurydirect.gov (it’s the same login you use for I Bond purchases). The government sells these weekly on Monday, Wednesday, and Thursday (schedule here and here). These Treasury sales are technically auctioned off, not sold, and you won’t know the exact rate until it’s complete. We’ll usually have a good estimation in advance of the expected sale rate.
Another option is to buy U.S. Treasuries from within your regular brokerage account, such as Fidelity, Schwab, or Vanguard. The major advantage of buying through a brokerage is that you can choose to hold until maturity or the bond can be resold at any time on the secondary market. Note, when reselling the bond its value may have fluctuated and you can end up with less or more than the expected payout rate, depending on market environment.
Additional Details
- You can schedule a purchase to auto-reinvestment so that when the current bond matures the system automatically buys an equivalent bond. For example, a 4-week T-Bill can be scheduled to automatically use the proceeds at the end of the 4 weeks to buy another 4-week T-Bill.
- Buying treasuries has an important tax advantage: U.S. Treasury Bills, Notes, and Bonds are exempt from state and local taxes. You do pay regular federal taxes, and you’ll get a Form 1099-INT from the feds every year.
- T-Bills pays out interest when the bond matures, and thus taxes are reported in the year of maturity. Interest on the longer term Treasury Notes and Bonds are paid out every 6 months and the income will thus be reported every year, even if bond maturity is years or decades away.
- TreasuryDirect sells Bills, Notes, and Bonds with a $100 minimum. Brokerages typically have a $1,000 minimum.
- You can buy treasuries in your brokerage retirement account.
- Treasuries purchased from TreasuryDirect are locked in until their maturity. You can move them over to a brokerage after 45 days and then sell them on the secondary market.
Should You Buy Treasuries
Short-term treasury rates are sometimes lower and sometimes higher than competitive high-yield savings accounts. Lately we’ve been seeing these government coupons often outpace traditional savings rates and even CDs. Someone looking to buy a CD can check the Treasury rates to see if they are offering a better rate, e.g. look at the 52-week T-Bill rate as a comparison to a 1-year CD.
Even someone who wants liquid cash might find the shortest T-Bills an option with the funds tied up for just 28 days. You can also stagger purchases to have cash available weekly. For example, someone with $8,000 in cash might buy $2,000 in T-Bills for each of the next four weeks (with auto-reinvestment), and will end up having cash available weekly should the need arise. Or you can buy them through a brokerage which allows them to be quickly resold on the secondary market.
Others like “laddering” their T-Bills purchases in 13-week, 26-week, or 52-week treasuries to take advantage of the (often) higher payouts on the longer bonds. You can split up your cash in multiple separate piles and buy treasuries in buckets so that not all of your money is tied up at once for the full 13, 26, or 52 weeks.
Our Verdict
Someone with a lot of cash on hand can sometimes spruce up their interest rate by purchasing U.S. treasuries instead of depositing in a traditional bank CD. Hopefully we got most of the basic details on T-Bills in this write-up. Let us know in the comments below of any errors or bits that need to be added.
