How to invest in Treasury bills – Forbes Advisor

If you're looking for a low-risk investment, your first choice should always be U.S. Treasury bills. Backed by the full faith and credit of the U.S. government, U.S. Treasuries are the safest investment assets on earth.

Treasury bills have the shortest maturity of any U.S. government bond, making them a great choice for short-term investments. Yields on Treasury bills have risen steadily over the last year, with most maturities now yielding more than 5%.

What is a Treasury bill?

Government bonds have a variety of maturities. Treasury bills, commonly referred to as T-bills, offer the shortest maturities of any government debt. Treasury bills are issued in 4-, 8-, 13-, 26-, and 52-week periods.

Unlike other bonds, such as Treasury bonds, Treasury bills do not have periodic interest payments. Instead, Treasury bills are sold at par, or at a discount from their face value.

If you want to buy $1,000 of Treasury bills that currently yield 5%, the U.S. Treasury will sell them to you at a discounted price of $950. At maturity, you will receive $1,000 and an additional $50 in interest.

T-Bills are highly liquid investments, meaning they can be easily bought and sold on the secondary market before maturity. They are actively traded on the public market, making them a flexible investment option.

Treasury Bills vs. Treasury Bonds and Treasury Bills

U.S. Treasury bonds and Treasury bills have longer maturities than Treasury bills. The differences are:

• National debt. These long-term Treasury securities have maturities of 20 to 30 years. As with any bond, the longer the maturity, the greater the risk and the higher the coupon, or interest rate, the bond pays. The debenture holder receives interest payments every six months and upon maturity the face value of the debenture is paid.
• Treasury notes. These medium-term securities have maturities ranging from 2 to 10 years. Interest is paid twice a year and the face value is returned at maturity. The 10-year U.S. Treasury bond is widely used as a financial market benchmark. When people talk about “U.S. Treasury yields,” they usually mean the yield on the 10-year U.S. Treasury.
• Treasury bill. T-Bills have short maturities of 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks. Because T-Bills have very short maturities, they do not offer interest coupons. Instead, these are called “zero coupon bonds” and are sold at a discount, with the difference between the purchase price and the face value at redemption representing the unpaid interest.

Treasury bills are a safe investment

Treasury securities are backed by the full faith and credit of the United States Government. Investment professionals use the yield on U.S. Treasuries as the risk-free rate, or the rate of return provided by a risk-free investment.

It is widely believed that the federal government has never met its obligations and never will. Investors holding T-Bills can rest assured that they will not lose their investment.

Due to the liquidity of the government bond market, Treasury bills are considered a zero-risk investment. According to the Securities Industry and Financial Markets Association (SIFMA), the outstanding U.S. government debt exceeds $11.2 trillion, with average daily trading volume exceeding $633 billion.

With a market of this size and trading volume, investors who want to sell can always find a buyer.

Treasury bills still have risks

Investing in Treasury bills involves risks. Here are some risk factors to consider.

• opportunity cost. T-bills are considered risk-free because you are guaranteed to get your money back. However, risk and return are directly proportional, and the investment return on Treasury bills is very low. Therefore, when you invest in Treasury bills, you run the risk of missing out on opportunities to earn higher returns with other investments.
• inflation. This is the rate at which the prices of goods and services in the economy rise, and is perhaps the biggest risk for T-bill investors. Rising inflation erodes the value of interest payments. Inflation can exceed investment returns and eat away at the value of principal. In a high inflation environment, Treasury bills become less attractive to investors.
• Interest level. Treasury bills become less attractive to investors when interest rates rise because they can earn higher interest income elsewhere.
• market risk. When the economy expands, stocks appear to perform better and become less risky. Lower returns make Treasury bills less attractive, reducing demand and lowering bond prices. Conversely, when economic conditions are more challenging, Treasury bills become even more attractive as investors seek refuge.

How to purchase treasury bills

Investors have options when it comes to purchasing U.S. Treasuries. One way he buys Treasury bills is to go directly to Uncle Sam and open a TreasuryDirect.gov account. This online platform is the main portal through which the federal government can sell bonds. To open an account, all you need is a U.S. address, social security number, and bank account.

Buy Treasury Bills with TreasuryDirect

By using TreasuryDirect, investors can save on fees. The cost required to start investing is only $100, and the buyer has two options.

Treasury bills are sold at auction, so investors must place bids. Competitive bidders specify their desired rate or yield, while noncompetitive bidders accept the current rate set in the auction.

When the auction ends, non-competitive bidders will have their orders filled first. Once all noncompetitive bidders are satisfied, securities are issued to competitive bidders starting with the lowest bid.

The U.S. Treasury publishes a bidding schedule that includes announcement, bid, and settlement dates. Buyers must place orders between the afternoon and evening before the auction date. Treasury bills with maturities of less than 52 weeks are auctioned weekly, and 52-week bonds are auctioned monthly.

A TreasuryDirect account works similarly to a brokerage account. Once your bid is accepted, the sales price will be debited from your bank account and the T-Bill will arrive in your TreasuryDirect account. When a T-bill matures, the face value is automatically deposited into your bank account.

Purchase treasury bills with your brokerage account

If you're a client of a large company like Fidelity, Vanguard, or Charles Schwab, it may be easier to order through your broker than open a separate Treasury Direct account. These companies do not charge fees on Treasury bills.

You can't fund an IRA through TreasuryDirect, so investors who want to buy T-bills for their personal retirement accounts must go through a broker.

Investors can also purchase Treasury bills on the secondary market, but purchasing new issues is generally a smarter option. When buying bonds on the secondary market, you have to pay a bid/ask spread, which is an unnecessary cost since auctions are held frequently.

How to build a ladder of bonds

A bond ladder using Treasury bills can be an interesting strategy for investors who want to manage interest rate risk and create a reliable source of income.

Building a bond ladder involves purchasing bonds of various maturities and holding them to maturity, providing a predictable income stream through interest payments over the holding period. At maturity, the bond's face value is reinvested.

You can build bond ladders for any term and reinvest in stages, giving you the flexibility to respond to changes in the interest rate environment.

Since laddering is intended to generate a predictable income stream, it only makes sense to invest in high-quality bonds. Treasury may not pay high interest rates, but its strong security ensures predictability.

Take-out

No one gets rich by investing in T-bills, but T-bills have no risk of default and are highly liquid. These can play an important role in a diversified investment portfolio, but it's important to ensure they fit into your overall investment strategy. It's always wise to work with a financial advisor to choose the investments that best help you achieve your long-term financial goals.