How To Invest In Treasury Bills – Forbes Advisor

When looking for low-risk investments, your first choice should always be US government bonds. Backed by the full trust and credit of the US government, Treasuries are the safest investment asset in the world.

US Treasury bills, also known as T-bills, are US government debt instruments with maturities of one year or less. Here’s what you need to know about investing in T-bills.

Treasury bills vs Treasury bills vs Treasury bills

US government bonds come in a number of different maturities. Here is a brief overview of each type:

• government bonds. These long-term government bonds have maturities of 20 to 30 years. As with any bond, the longer the maturity, the greater the risk, the higher the coupon – which is the interest rate bonds pay. Bondholders receive interest payments every six months and are paid the face value of the bond at maturity.
• treasury bills. These medium-term securities offer maturities of two to ten years. You pay interest twice a year and pay back par – or face value – at maturity. The 10-year treasury note is a widely used financial market benchmark. When people say “Treasury yields,” they usually mean the 10-year Treasury yield.
• treasury bill. Treasury bills have short maturities of four, eight, 13, 26 and 52 weeks. Because they offer such short maturities, T-Bills do not offer interest payment coupons. Instead, they’re called “zero-coupon bonds,” meaning they’re sold at a discount and the difference between the purchase price and the face value at redemption represents the accrued interest.

T-bills are a safe investment

Treasury bonds are backed by the full confidence and credit of the US government. Investment professionals use Treasury yields as a risk-free interest rate, or a yield that a risk-free investment offers.

The federal government has never defaulted on any obligation, and it is widely believed that it never will. Investors holding T-Bills can rest assured that they will not lose their investment.

T-Bills are also considered a risk-free investment thanks to the liquidity of the Treasury market. According to the Securities Industry and Financial Markets Association (SIFMA), more than $11.2 trillion of U.S. Treasury bonds are outstanding, with an average daily trading volume of over $633 billion.

With a market of this size and trading volume, investors looking to sell will always find a buyer.

T-Bill still has risks

Investing in T-Bills is not risk-free. Here are some risk factors to consider.

• Opportunity costs. T-bills are considered risk-free because you can be sure that you will get your money back. But risk and reward are directly proportional, and T-bills offer very low returns. So when you invest in T-Bills, you risk missing out on an opportunity to earn a higher return elsewhere.
• Inflation. This is the rate at which the prices of goods and services are increasing in the economy and is perhaps the biggest risk facing T-Bill investors. Rising inflation undermines the value of interest payments. Inflation can exceed investment returns and reduce capital value. T-Bills become less attractive to investors in highly inflationary environments.
• Interest charges. T-Bills become less attractive to investors when interest rates rise because they can earn higher interest income elsewhere.
• market risk. When the economy expands, stock performance benefits and stocks appear less risky. When yields are low, T-bills become less attractive and demand falls, pushing down bond prices. Conversely, in a tougher economic environment, T-Bills become more attractive as investors seek a safe haven.

How to buy T-bills

Investors have options when it comes to buying Treasuries. One way to buy T-Bills is to go straight to Uncle Sam and open a TreasuryDirect.gov account. This online platform is the federal government’s main portal through which it can sell bonds. To open an account, all you need is a US address, a social security number, and a bank account.

Buying T-Bills through TreasuryDirect

By using TreasuryDirect, investors save on fees and commissions.

It only takes $100 to start investing and the buyer has two choices.

T-Bills are sold by auction, so investors must place a bid. A competitive bidder specifies the desired rate or yield, while an uncompetitive bidder accepts the common rate set in the auction.

When the auction ends, orders from non-competitive bidders will be filled first. Once all non-competitive bidders are satisfied, the competitive bidders are issued securities, starting with the lowest bidders and increasing.

The US Treasury Department publishes auction schedules detailing announcement dates, auction dates, and settlement dates. Buyers must place their order between the afternoon and the night before the auction date. Treasury bills with maturities of less than 52 weeks are auctioned weekly, while 52-week issues are auctioned monthly.

A TreasuryDirect account works just like a brokerage account. If your bid is accepted, the sale price will be debited from your bank account and the T-Bills will be deposited into your TreasuryDirect account. When the T-bill is due, the nominal value is automatically credited to your bank account.

Buying T-Bills through a broker

For clients of large firms like Fidelity, Vanguard and Charles Schwab, placing an order through your broker may be easier than opening a separate TreasuryDirect account. These companies do not charge for T-bills.

Investors wishing to purchase T-Bills for Individual Retirement Accounts (IRA) accounts will need to contact their broker as it is not possible to fund IRAs through TreasuryDirect.

Investors can also buy T-Bills in the secondary market, although buying new issues is generally a wiser option. When you buy bonds in the secondary market, you have to pay the bid-ask spread, which is an unnecessary expense as auctions are frequent.

How to build a bond ladder

Bond laddering with government bonds can be an interesting strategy for investors looking to manage interest rate risk and create a reliable income stream.

Building a bond ladder involves buying bonds of varying maturities and holding them to maturity, paying interest over the holding period to provide a predictable stream of income. At maturity, the face value of the bond is reinvested.

You can build a bond ladder for any period of time, and tiered reinvestment means you have the flexibility to respond to different interest rate environments.

Since laddering is designed to generate a predictable income stream, it only makes sense to invest in high-quality bonds. While Treasuries may not pay high interest rates, their rock-solid security ensures predictability.

take that away

While nobody gets rich investing in T-Bills, they are free of default risk and very liquid. They can play an important role in a diversified investment portfolio, but it’s important to ensure they fit into your overall investment strategy. It is always wise to work with a financial advisor to select the investments that are best suited to achieve your long-term financial goals.