Can you make good money with short-term U.S. Treasury bills? Current yields are topping 5% on durations from one month to six months, and money gurus and analysts alike are yelling from the rooftops that it’s time to buy. With the looming debt-ceiling debacle, yields could continue to soar on shorter investments like Treasury bills, which have maturities up to a year. Meanwhile, longer-term Treasury notes and bonds, which have time frames from two to 30 years, could dip.
If your portfolio is worth billions, like financier Bill Gross, or you’re managing institutional money in the trillions, that kind of quick moving strategy makes sense. Those types of investors are moving around mounds of money every day.
But what if you’re just a regular person investing on their own? It sounds great to earn more than 5% on a risk-free investment, but if you’re only putting in part of your cash bucket for a short bit, you’re going to earn pocket change – and owe taxes on the gain and potentially pay fees. On $1,000, you’re talking about maybe a $50 profit.
Yes, you can do this over and over and earn a nice amount of interest relative to your principal. But with short-term Treasury bills in a volatile market, there’s no guarantee that when you go to rollover your investment for another round the rate will be as high – or higher than you could get with a CD, high-yield savings account, another duration of Treasury security or even Series I bonds.
“We see very little risk premium in moving right now from shorter-term T-bills to longer-dated corporate or municipal bonds,” says Scott Bishop, a Houston-based certified financial planner with Avidian Wealth Solutions.
Build a ladder
What you really need is a long-term solution as an individual investor, whether you have professional help from a financial adviser or are going at it alone. Bishop structures fixed-income ladders for his clients, which means you hold fixed-income investments at various maturities all in a row. When one rung comes up, he looks at market conditions and decides where to deploy the free cash next. If things shift considerably between rungs, he contacts clients and talks about accelerating the process, cashing out of an existing Treasury position and buying new securities that have better rates.
You have three buying choices for Treasury bills in your ladder, and each comes with its own pros and cons.
Buy T-bills direct
You can purchase new Treasury bills at auction directly from the U.S. government with no broker at TreasuryDirect.gov. The process is not onerous – you create an account, attach a bank account and click buy, just like any other retail purchase. But the Treasury website is notoriously wonky, and has many layers of security. Also, your holdings are not easily integrated with the rest of your money, so it’s hard to see it all in one view.
The biggest quirk is that when you buy at auction, you select a duration and an auction date – say 8 weeks set to sell on May 11 and be issued on May 16. But you won’t see the price or the exact yield until you actually get the sale confirmation. You can check current yields in other places, but it won’t be right there when you purchase. Also, you won’t have immediate liquidity during the term of the bill and would have to jump through some hoops to sell.
At the time of purchase, you can choose to automatically reinvest your purchase after maturity for up to two years, or you can schedule the funds to land in your bank account and figure out what to do next from there.
Buy from a broker
There’s a bit more flexibility and information available at purchase when you go through a broker, but some may charge you for that convenience. You’re not giving up a huge cut, but enough to impact a very small return.
Still, Bishop not only feels comfortable with his clients going through brokers for T-bills, but also recommends it. You’ll still get the full government protection and get the requisite tax information you need. “I would much rather see individuals buy them at brokers versus having to worry about tracking them on a government website,” he says.
At the broker, you’ll buy through their fixed income section, and you’ll be able to select a range of T-bills at various prices and yields, because you’ll be buying from the secondary market and not directly at auction from the government.
You’ll see a dashboard that shows various durations, yields and other information, and then you can click through and purchase. The price will be listed at a discount to the face value based on the yield. Basically, using round numbers at 5%, you’d buy it for $950 and when it matures, you’d get $1,000. “Because T-bills are sold at a discount to the face value of the bond, investors earn the difference at maturity based on market fluctuations,” says Mark Hamrick, senior economic analyst at Bankrate.com.
Some brokers will help you build a Treasury ladder – or CD, or other fixed income products – with proprietary tools. But you can also do this on your own by selecting options at different maturities and then continuing the chain as each matures. You can cash out on demand.
Buy Treasury ETFs
Your best and easiest option as an individual investor might be to invest in Treasury ETFs rather than buy them individually and manage the whole process on your own. Although T-bills are a fixed-income security, they are bundled together as exchange-traded funds and you can buy them by their ticker symbol wherever you have an account, usually for no transaction costs. You will pay a fee as an expense ratio, but ETFs traditionally have low fees. The iShares 0-3 month Treasury Bond ETF
You can ladder these as well, picking a mix of short-term T-bill, midrange Treasury note and long-term Treasury bond options. You can cash out when you want, but you can also hold the ETF and not have to do anything to reinvest. For long-term investors, it’s the easiest for allocation and redeployment.
“For clients who are fully deployed in the market, we have pulled some risk back moving to some more value (high quality) and also away from some of the riskier parts of the markets and added some T-bill ETFs,” Bishop says. “Most have felt very comfortable that they did not want excess risk now with valuations in the markets where they are.”