I received the annual bonus from my employer for my work last year. I need to save this money for some planned expenses in the second half of this year.
I can just put it in a money market fund or online savings account. The rate can be a little higher at some places where I don’t have an account.
I can also put half in a 3-month CD and half in a 6-month CD. Again, to get the best rates, I’d have to open accounts at places where I don’t have an account now. For the amount involved it’s not worth it.
Instead I’m going to try something else: Treasury bills. Treasury bills from the U.S. government are most similar to a short-term bank CD in that you lock in a fixed interest rate for a fixed term. I can buy Treasury bills in my existing brokerage account. Interest earned from Treasury bills is also exempt from state income tax.
Yields of Treasury bills have gone up quite a bit in the last year. Banks didn’t raise the rates on their CDs or savings accounts nearly as much. You can see the latest yields on Daily Treasury Yield Curve Rates.
You can buy Treasury bills directly from the U.S. Treasury via TreasuryDirect, or you can buy them in a brokerage account. The top 3 brokerage firms Vanguard (on the brokerage platform), Fidelity, and Schwab all sell new-issue Treasury bills with no fee whatsoever. I prefer to use Fidelity for this because they provide better customer service than TreasuryDirect.
The U.S. Treasury currently sells new 3-month and 6-month Treasury bills every week on Mondays. You never have to wait long for the next round. You will see new issues available in the brokerage account on Thursday afternoon. You place your order between Thursday afternoon and Sunday. If you are interested in an even shorter term, they also sell new 4-week and 8-week bills every week on Thursdays. You place your order between Tuesday afternoon and Wednesday. For the current schedule of upcoming sales, see Tentative Auction Schedule from the U.S. Treasury.
Yields are determined by an auction but you don’t have to worry about any bidding. The banks will do the bidding and you are just tagging along. You get the same yield for your tiny $1,000 purchase as a bank buying $100 million. Treasury bills are sold at a discount. You pay slightly less than $1,000 for each $1,000 bill. When the bill matures you receive the full $1,000. The difference is your interest. When you buy in a taxable brokerage account, the brokerage firm will send you the necessary tax form for your taxes.
I took these screenshots when I placed the order with Fidelity. If you can’t figure out how to do it, please contact customer service. Be sure to select New Issues. You get no fee or spread only when you buy a new issue.
Under News & Research on the top, click on Fixed Income, Bonds & CDs.
Click on the New Issues tab.
Click on the plus symbol next to Treasury to expand the upcoming issues. You will see the maturity date of each issue and the expected yield. The expected yield will be very close to the actual yield after the auction. Click on Trade to buy the issue you are interested in.
Treasury bills are sold in $1,000 increments in a brokerage account. Enter a quantity of 1 if you’d like to buy $1,000 worth of Treasury bills. It will cost slightly less than $1,000. Fidelity lets you set up Auto Roll to automatically buy another Treasury bill of the same term when this Treasury bill matures. Because I need to use the money after the bills mature, I didn’t choose Auto Roll.
Again, there is no fee whatsoever from Fidelity when you buy new Treasury bills.
Here are the steps to buy Treasury bills in a Vanguard brokerage account (the newer platform, not the mutual-funds-only platform). Again if you can’t figure out how to do it, please contact customer service. Be sure to select “Auction.” You get no bid/ask spread only when you buy a new issue.
Click on the Transact dropdown next to your account and scroll to the bottom. Click on Trade bonds or CDs.
Click on the Treasuries tab and the Auction radio button.
You will see a list. The Treasury bill available for accepting orders will have a Buy link. If you don’t see a Buy link for the term you’d like to buy, check the calendar from U.S. Treasury and come back between the afternoon on the Announcement Date and the day before the Auction Date.
On the order page, the minimum quantity of 1 is $1,000 in face value. If you’d like to buy $10,000 worth, enter quantity of 10. Vanguard does not offer the Auto Roll feature.
Similar to Fidelity, there is no fee whatsoever from Vanguard when you buy new Treasury bills.
You can do the same thing at Charles Schwab as well. There is also no fee whatsoever from Schwab. I don’t have screenshots because I don’t have an account with Schwab.
The same process can also be used to buy longer-term Treasury notes or Treasury bonds. You can buy 1-year, 2-year, 3-year, 5-year, 7-year, or 10-year Treasury notes or 30-year Treasury bonds. See Daily Treasury Yield Curve Rates for current rates. They become available for sale at different times of the year. Check the calendar from U.S. Treasury if you are interested in buying longer-term Treasuries. They become available to accept orders between the afternoon of the Announcement Date and the day before the Auction Date.