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.
Perhaps-helpful idea #2: EconForecasting maintains a treasury yield rate forecasting tool that is easy to use, and I have found it to be pretty accurate: https://econforecasting.com/forecast-treasury-curve
I find it particularly helpful when deciding whether and how to ladder (which durations of treasuries, e.g. 4 weeks, 8 weeks). You can easily see the yield curve for today, historical values, and projections for future dates–nice interactive visuals AND charts. 🙂
Perhaps-helpful idea #1: For the last ~2 years I have been using T-bills to arbitrage the 0% promotional rates that sometimes come with sign up bonuses. That is, I make the minimum payments on the 0% cards, buy T-bills for the difference of the monthly balance, and then payoff the cards in full when the T-bills mature and before the promotional rate ends. Totaled a little over $500 in what I think of as an “additional bonus” in 2023.
I prefer going through Treasury Direct for this purpose, because 1) it removes interest rate risk at sale/maturity (which I am more sensitive to when arbitraging than investing) and 2) paying a brokerage fee would reduce the “bonus” 🙂
sg77,
I just logged into my destination account for my 2nd T-Bill purchase. The below quoted transaction is shown for the date of 11.8.23. That is date that I initiated the purchase on TD’s website. BTW, the Xs were different number sequences.
I logged into my destination account for my 1st T-Bill purchase and no such “Comment” showed up there at any point.
Have you ever received this “Comment” in any of your destination accounts? Don’t you think it’s odd that they use the words “Withdrawal Prenotification” instead of “Deposit Prenotification”? I guess they mean it as a withdrawal from TD but had I seen this sooner, I would have been really nervous about where the withdrawal was going to be made.
BTW, the reason I wasn’t nervous is I just happened to check my “Source of Funds” account earlier this morning and saw that the funds were removed from there this morning.
“ACH Comment / TREASURY DIRECT XXX TREAS DRCT XXX DBT NEW TD PURCHASE XXX: Withdrawal Prenotification Received”
sg77,
Yesterday, when I made this comment tagging wasn’t working. I figured I would tag you now so you will definitely see it.
Eric 🔗 I haven’t seen that before. Though, I don’t know if my bank accounts would even show prenotifications to me.
It’s interesting to find out that TD sends this notification to the destination accounts. You are probably right that most just don’t bother to share that information with us.
Wow, the 20-year T-bond auctioned this week at price of $89.352074 per $100, yielding 5.245% after an interest rate of 4.375% (paid every 6 months).
Chuck
“We’ll usually have a good estimation in advance of the expected sale rate.”
How do you estimate the rates of upcoming bonds? I would like to learn that before venturing ahead. Please help.
you can look at recent auctions (http://www.treasurydirect.gov/auctions/announcements-data-results/)
and the daily par yield curve (http://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve) to get an idea of where things are…
Thank you for the helpful link, jd!
Something that surprised me about reinvestment of a T-bill on TreasuryDirect: they sent the difference between the face value and the discounted price of the new T-bill to my Primary Bank account (which is different than the source & destination banks I specified when buying the bill). e.g., if I bought a $1000 T-bill with money from bank A, destination bank B, set to reinvest; on the maturity date, the discounted price for the next issue of the T-bill is $996, and $4 is sent to bank C which was set as my Primary Bank.
https://www.treasurydirect.gov/indiv/help/treasurydirect-help/user-guide/211-220/#216 has this explanation: “You may also owe additional funds if accrued interest is being charged, or backup withholding affected the amount of the maturing proceeds. If additional funds are due upon reinvestment, the funds will be debited from your primary bank, unless the original security associated with the reinvestment was purchased May 15, 2010, or after, with C of I funds. In this case, your C of I will be debited. Any refund due as a result of the reinvestment will be credited in the same manner. “
sg77,
I am considering buying a 4 week TBill on TreasuryDirect this week. The next one available has an “Auction Date” of 11.2.23 and an “Issue Date” of 11.7.23. If I submit the purchase today, will the funds be removed from my external account on 10.31.23 (tomorrow), on 11.2.23 (Auction Date), 11.7.23 (Issue Date) or some other date? If the answer is tomorrow, can I wait until Wednesday or Thursday to submit this to get an extra 2 or 3 days of interest?
Are you saying in your example that if I put in a purchase price of $1000 only $996 will be removed from my account on the date you answered in my previous question?
Is there a way to change the “Maturity Payment Destination” account a couple of weeks after the purchase or is that locked in? If I am unsure where I want the funds to go (ie I don’t know which bank I will need it for a bonus), should I select “Zero-Percent C of I”? If I select that, do the funds end up in the same place that my I-Bonds ended up when I redeemed them?
Eric 🔗 in my experience, for T-bills, the withdrawal came out of my external bank on the Issue Date. The day you submit it shouldn’t make a difference.
Yes, only $996 would be taken from your external account (the specific amount depends on the rate; you’d get back $1000 when it matures).
You can edit the payment destination after the purchase (you can also change the number of reinvestments after the purchase). I’ve never tried redeeming into C of I; I’ve just selected a bank (for both T-bills and I-bonds), which can be changed later; but selecting C of I first would probably also work. C of I is like a bank account held internally at TreasuryDirect.
Thank you for the responses.
In that scenario, you would receive $4 in the “Primary” account and $996 in the “Destination” account, correct?
I guess choosing C of I would only be valuable if you wanted to send the funds to multiple accounts once it matures.
If you’re not doing reinvestment, then when the T-bill matures, the whole $1000 would be sent to your destination account. The scenario where the Primary Bank got $4 was just when I had enabled automatic reinvestment.
What is the benefit to setting it to reinvest? Aren’t you better off letting it mature and then moving it the best current rate T-Bill or out of TreasuryDirect entirely if nothing is enticing?
Mainly convenience. It gets whatever the new rate is at the next auction of the same duration T-bill. That’ll likely be better than my savings accounts. If I eventually want to withdraw the money, I can edit it to turn off reinvestment.
Also I’m not sure how the timing works if you manually buy different T-bills. If the auctions are on a different schedule, then maybe there’d be some days in between where you get no interest (though if the destination is an external bank that pays interest maybe you won’t really miss out). If you want a T-bill with different duration and the issue date is the same day as the maturity date of your existing T-bill, are you able to use those funds immediately? I’ve never tried it. With reinvestment the money goes immediately into the next T-bill.
sg77,
If you end up being correct that the money doesn’t get taken out until the issue date (11.7.23), I think I would just always open a new T-Bill rather than ever reinvest.
When I first bought T-bills, I bought a bunch of different durations, and they matured on different days. It was a mess to keep track of and annoying to keep logging in to buy another.
Now I just have a chunk of money that reinvests in 4-week T-bills, another chunk that reinvests in 13-week T-bills, etc, and I don’t need to do anything else.
But there’s probably other ways of keeping it simple, like if you just have one big chunk of money in a single T-bill. Or if you set up a more structured pattern, like maturing on the same day every week.
sg77,
You were correct as the money was removed today. I am interested in buying another T-Bill for Thursday’s auction.
Do you happen to know if I need to make the purchase by tomorrow for it go through or if I can still make the purchase on Thursday (11.9.23)?
If the latter, what time is the deadline on Thursday for me to make the purchase of the T-Bill?
I’ve never tried submitting a purchase on the same day as the auction. In my quick web search, I see an article saying “Noncompetitive bids are limited to $5 million and are usually due before 12:00 noon (ET) on the day of an auction.” But in practice I don’t know if that’s the actual cutoff time for TreasuryDirect and/or other brokerages.
I meant to log into my TD account this morning to see if it was still available. Unfortunately, I got sidetracked with other things and wasn’t able to login until a few minutes ago.
Anyway, not surprisingly, the 11.9.23 auction is no longer available. I still don’t know if 12 PM is the correct cut-off but it’s definitely safer to do the day before regardless.
sg77,
In that case, I will initiate the purchase today. I might check tomorrow to see if it’s still available so I will know for the future.
sg77,
Do you what “High Rate” means at the link below?
https://www.treasurydirect.gov/auctions/announcements-data-results/
Search for “high rate” in the comments here to see my old comment about it (but basically I would ignore high rate and just look at investment rate).
sg77
Looking at the schedule, 4-week bills normally auction every Thursday, and issue and mature on Tuesdays. Does that mean the funds for a reinvestment will sit in the CofI for a whole week? Or do they mature/reinvest on the same day? Thats like a 20% haircut on your average 4-week rates if they sit idle for a week, and 7% on the 13-weeks…seems a high price to pay to avoid logging in once or twice a month…
The money is reinvested into the new issue T-bill on the same day that the previous one matured. (That’s when using Treasurydirect, and I heard that Fidelity is the same but Schwab has a 1 week delay).
Nice, so no days lost… thanks for the info!
Also, when a T-bill matures, I actually see the deposit in my destination bank on the day before the maturity date (this might depend on how fast your bank posts direct deposits). I’m not sure when the cutoff date is for changing the destination bank.
So instead of losing about a week of interest I will possibly gain 1 day of interest? Have you ever found the system make a mistake when you changed the destination account after purchase?
Yeah I think you potentially double dip interest on 1 day if the destination is an external bank. I’ve never actually tried changing the destination after purchase, except that I tried it to see that it’s possible, and then I immediately changed it back.
sg77,
The funds from the 1st T-Bill that I purchased reached my destination account today so it did not arrive 1 day early. It’s possible that all of the destination accounts that you’ve used previously allow “early DD” and the account that I used doesn’t.
Also, I changed my destination account only about a week before maturity and the funds reached the correct account. I’m letting you know because you earlier wrote that you never actually tried this.
BTW, did you receive a “New Reply” email in addition to the “New Comment” email for this comment that I made? I tagged you in case you don’t receive the “New Reply” emails since the website was updated.
I never receive them anymore. mangorunner has let me know that they also do not receive those. 007 and Will said that they do receive them. Therefore, I have no idea if I am in the minority or the majority related to this.
I got a “New Reply” email, and a “You have been mentioned” email. I don’t usually subscribe to a page (which I guess would give the “New Comment” email); I just click the bell icon to be notified of replies to my comments. So I think it’s working as expected for me.
Can you guys share which banks you used that did/didn’t post the deposit early?
SoFi is where I got it 1 day early.
Amex did not post it 1 day early.
sg77,
I realized after I sent that comment that your old comment was from back in October so it’s not a good DP.
Did you receive a “New Reply” email for this comment?
yup
William Charles,
In the other post, you told me to reach out to some guy to troubleshoot why I am not receiving the “New Reply” emails. They never replied to my comment. Please advise how I can get in touch with them.
The plugin is called wpdiscuz, should be able to send an email or post in the forums. Like I said I actually posted the same question to them and then they tried to troubleshoot it and it worked fine for them (and also for me). Before doing that i’d recommend trying with a completely different browser/e-mail combo to see if that resolves the issue as it only seems to be affecting a small amount of people. I assume it has something to do with browser plugins and/or your cache settings.
I just sent them an email. Hopefully I will hear back from them.
The US government defaulting seems like a very real possibility in the near future. In such a catastrophic event, what would happen to Treasury bills, notes and bonds that mature in the coming month? Would the buyer of treasuries just be out of luck and not receive their principle amount loaned out back? Just the thought of that is depressing. The risk seems pretty high right now. I’d much feel safer putting my money in a high yield savings account instead. Turbulent times the market has seen in the past 5 years. Maybe one day I’ll be able to retire and not stress about my finances anymore..
Uncharted territory for sure. Some people think that they would have to prioritize, and you have to pay off debt first, which would include treasuries.
Worst case scenario, payment might be delayed, it’s not like they are going to just not pay out those billions/trillions of treasuries. If it got to that point, something would be done in a crisis situation, even kicking the can. Neither side wants to give in until absolutely necessary and lose bargaining power. Just like any standoff over a contract/labor dispute.
If payment is delayed you are losing out on opportunity cost of the principle amount which could’ve been invested elsewhere until whenever the government decides to pay back the loan. That’s not nothing.
there’s no way they won’t pay those, think of all the “too big to fail” institutions holding them…
first step would probably be a government shutdown and suspension of payments to all the civilians, contractors, soldiers, boomers, and sick people depending on that money, lol
TreasuryDirect removed the virtual keyboard “to improve the customer experience” and you can now just paste your password
It also says two-factor authentication now required every time, and you cannot register/save your computer. Codes are valid for 24 hours instead of 15 minutes.
Guess that’s what we get for them removing the virtual keyboard…
Didn’t realize it was going to be every time, ugh. Typical give with one hand, take with the other.
I’m new to treasuries. Hoping some can answer my questions about treasury bills.
Let’s say I want to buy a 4 week treasury bill using my Wells Fargo brokerage account, how long from the time I place the order will my account reflect that I own the 4 week treasury bill? Like when does the first day of that 4 week contract start? Is it the same day of the order? Like how long does an order take? Would my account value show $0 at any point while waiting for the order to complete?
What happens in the event my bank, which I’ve bought the treasury bills in, goes bankrupt? Will the US government give me back my money for the treasury bills or did I just lose all the treasury bills I had purchased in that bank’s brokerage? Is there a max limit like 250k that’s insured? Or are all amounts backed by the full faith of the government?
What happens if the 4 week treasury bill is higher the next week than the week that I purchased it? Does it mean my account value will then fluctuate like a stock price? Or is my account value guaranteed to never be lower than the price I paid for the treasury?
Thanks all
Freya I’m no expert but I’ve read up on them over the last few weeks and bought some through TD: Every treasury auction lists an “effective date”, that is when the clock starts and that is the effective date you “own” it. You have to have your bid submitted by the closing time listed in the auction announcement. The times differ for competitive and non-competitive bids. I believe you can submit competitive bids through 3rd party brokerages like WF, but it is easier to just do a non-competitive bid unless you really know what you are doing. Treasuries are owned by the US Government, at a very high level you are loaning the government money, and they are paying you interest on top of the amount you loaned them, at the end of the specified term. In other words, it is the opposite of you getting a loan from a bank. Your bank/brokerage does not own the bill, you do, they are merely facilitating the transaction for you. All of your t-bills are backed “in full faith by the US government”, they are technically safer than any amount over $250k in a bank(which is required to be FDIC insured up to $250k). Say you had a $500k CD in a bank like SVB or FR that just went belly up, you’d get your $250k back but the remaining $250k would be at risk, not sure if you would be successful in getting that back. If you had that $500k in treasuries, none of it would be at risk. Once you buy, you are locked into that rate that you bought at. The value will not fluctuate, you’ve already bought it, it’s done. However, with a 3rd party brokerage like WF, you could possibly try to sell it before maturity, and that might get you a higher price if rates jumped way up since you bought. There is a market for buying/selling treasuries before maturity. It can be a gamble as you don’t really know what rate you are going to get, but if you look at the daily rate trend leading up to the auction date, you can get a pretty good idea of what rate you will get. Remember, since bills are short term so when you buy, you buy them at a “discount” which is set in the auction. So once the auction is done and they collect payment, they would collect less than the amount you bid at. $100 is the min purchase, so say you bought $100, there would be a price specified, like $98.78 or something. That would be debited from your funding source you pick when you purchase through WF brokerage, and once they reach maturity you get paid out a full $100. As with all treasuries, that $1.23 for this example(or however much the difference is between what you paid and what you bought) is taxable interest and taxable only at the federal level, it is exempt from state and local taxes. Now… Read more »
8-week bills auctioned today at a high investment rate of 5.537%.
More significantly, 4-week bills auctioned at a high inv. rate of 5.964%. That’s not a typo.
https://www.treasurydirect.gov/auctions/announcements-data-results/
yeah, nobody wants them because, fiscal cliff