Savers looking for a safe, steady, angst-free investment for a year or less can now get the best yields in years from Treasury bills — thanks to the Federal Reserve.
Not even a downgrade of the US credit rating could derail those returns.
Treasury bill yields are above 5% after the Federal Reserve lifted its benchmark lending rate by a quarter-point last week, pushing interest rates to their highest level in 22 years.
A one-year T-bill is now yielding 5.36% versus 3.09% a year ago. A six-month T-bill was at 5.52% compared with 3% a year ago, and the three-month T-bill was yielding 5.53%, up from 2.56% a year ago.
While these short-term securities issued by the federal government are not a swing-for-the-fences type of investment, T-bills currently offer savers a better yield than most online savings accounts and short-term certificates of deposit.
"Cash-like assets, including T-bills, can provide investors with a sense of safety and control during market volatility, but it’s important to separate emotions from strategy," James Martielli, head of investment trading services at Vanguard, told Yahoo Finance. "Recent rate hikes have increased returns across this category, but the role of these assets remain unchanged."
Even after Fitch Ratings agency this week lowered the US sovereign debt rating to AA+ from its top score of AAA, experts expect the move will have "no material impact on Treasury yields."
"The US Treasury market is the global safe haven," Mark Zandi, chief economist at Moody's Analytics, told Yahoo Finance. "Sure, the US has significant fiscal problems and our politics are a mess, but that’s nothing new. It’s been that way, more or less, since the nation’s founding. The US Treasury has been good money, through thick and thin, and global investors know it."
Here’s what else to know.
What are T-bills
Treasury bills — like I bonds and Treasury inflation-protected securities, or TIPS — are issued by and backed by the US government. I bonds, for example, pay interest for up to 30 years. T-bills are typically for people looking for short-term savings of up to a year.
Additionally, savers benefit from tax savings on T-bills, which are exempt from state and local income tax.
How T-bills work
T-bills are sold at a discount to their face value; when the bill matures, your interest is the difference between what you paid and the T-bill’s face value. For example, if you bought a $1,000, one-year T-bill at a rate of 5%, you would shell out $950 upfront and receive $1,000 at the end of the year.
You must buy on auction dates, which are weekly for all maturities, except the one-year T-bill, which is every four weeks. Most individual investors make a noncompetitive bid, which means you land the average yield set at auction.
When you buy through TreasuryDirect — the government’s website — you must hold new Treasury marketable securities for at least 45 calendar days before transferring or selling them (even if it’s a four-week security). Interest is paid when the security reaches maturity.
You won’t pay a penalty or fee if you want to sell early like you would if you pulled your money from a CD early. That said you could possibly lose money, if the sale price of the T-bill is lower than the original purchase price, which you are guaranteed at maturity.
Where to purchase T-bills
You can buy newly issued Treasurys in terms ranging from four weeks to 52 weeks through your bank or brokerage, which may charge a commission. Or, you can buy them online for a minimum of $100 through the government’s TreasuryDirect program, with no commission.
Large firms, however, such as Charles Schwab, Fidelity, and Vanguard, do not charge a fee when you buy a T-bill. That said, the minimum order for a new-issue Treasury is typically $1,000 in face value when you purchase it via a brokerage.
And if you want to purchase T-bills for individual retirement accounts (IRA), you must go through a broker. For those nearing retirement, these can be a shrewd place to set aside cash without losing sleep over what might happen with the stock market.
If you’re looking for a place for your emergency fund, however, T-bills are probably not your best option. Unlike money market funds or high-yield savings accounts, you need to sell a T-bill if you’d like to tap the cash prior to maturity — which may result in a price higher or lower than the purchase price.
Eric Park, a certified financial planner at LPL Financial in Washington, Mo., has this advice: "Keep in mind that while US Treasury debt will mature at full value, their prices fluctuate in value along the way. The longer the maturity, the more they fluctuate, so if you’re unsure when you might need the money, or have time at your disposal, you may consider a laddering concept."
With a laddering strategy, you invest in several T-bills with staggered maturities, giving you the opportunity to either reinvest at higher rates as the terms expire, or to invest or use the funds somewhere else.
"Laddering provides some compromise in commitment and some diversity of maturities," Park added.