When you’d like to invest for a guaranteed return, I Bonds are a good option (see How to Buy I Bonds). However, the government imposes an annual purchase limit on savings bonds. After you buy all the I Bonds you’d like to buy, if you still would like to invest a sum of money for a fixed term, buying CDs directly from a bank or credit union used to be the answer but that isn’t necessarily the case today.
Treasuries Beat CDs Now
When the Federal Reserve started raising interest rates, the financial markets responded right away. Banks and credit unions are still slow to raise the rates they pay on savings accounts and CDs because they don’t need more deposits and they take advantage of people’s inertia and ignorance of the going rates.
In addition, Treasury securities have low credit risk because they are guaranteed by the full faith and credit of the United States government. They require a low minimum investment of only $1,000. The term can be as short as four weeks. The interest is exempt from state and local income taxes. You can buy them in your existing brokerage account as opposed to having to open a new account at a bank you aren’t familiar with. Why in the world would someone buy CDs from banks and credit unions that pay a lower yield than Treasuries?
Because investors don’t know they can buy Treasuries so easily for a higher yield than CDs at this moment.
When you already have a TreasuryDirect account for I Bonds, you can use the same account to buy regular Treasuries but it’s easier to buy them at a broker. You can buy new-issue Treasuries through major brokerage firms Fidelity, Vanguard, Charles Schwab, TD Ameritrade, and E*Trade with no fee whatsoever. Also, you can buy them in your Traditional or Roth IRA at the broker, whereas TreasuryDirect doesn’t offer IRAs.
Treasury Yield
Although you can buy Treasuries at any time on the secondary market (see How to Buy Treasury Bills & Notes On the Secondary Market), I prefer to buy new-issue Treasuries because you don’t have to pay a bid/ask spread when you buy new issues. While the bid/ask spread may be small, it just isn’t necessary to pay it when you have the opportunity to buy a new issue.
This is the case especially for short-term Treasuries maturing in six months or less because a new issue comes out every week. Paying a bid/ask spread once to buy a 10-year Treasury and holding it for 10 years may be OK but paying a bid/ask spread every month adds up fast.
The yield you’ll receive on a new-issue Treasury is determined by an auction process but you don’t have to make any bids. You only say how much you’d like to buy in your order. The banks will do the competitive bidding and you ride their coattails. You get the same yield for your tiny $1,000 order as a bank buying $100 million.
You can get a feel of where the yield might land by checking Interest Rate Statistics on TreasuryDirect (click on the first heading on the page for Daily Treasury Par Yield Curve Rates).
Treasury bills (“T-Bills”) with a maturity of one year or shorter are sold at a discount to par value. You pay slightly less than $1,000 for each $1,000 bill. You automatically receive the full $1,000 in your brokerage account when the bill matures. The difference is your interest.
Treasury notes (“T-Notes”) and Treasury bonds (“T-Bonds”) with a maturity of two years and above are sold at slightly less than the face value. You receive interest payments in your brokerage account every six months, and the full face value will show up automatically in your brokerage account when it matures. You don’t need to sell or do anything when you hold Treasuries to maturity.
Minimum Order Size
The minimum order for a new-issue Treasury is $1,000 in face value when you buy it in a brokerage account. You can order in $1,000 increments up to $5 million in face value.
The minimum order for a new-issue Treasury is $100 in face value when you buy it at TreasuryDirect. You can order in $100 increments up to $5 million in face value. Because you can’t sell Treasuries in your TreasuryDirect account before they mature (must hold to maturity or transfer to a brokerage account), it’s easier if you buy them in a brokerage account.
Order Window
You only need to know when the U.S. government will sell a new batch of Treasuries next time. Right now the government sells shorter maturities weekly and longer maturities monthly. You won’t have to wait long for the next sale unless you’re buying TIPS.
| Maturity | Sale Frequency |
|---|---|
| 4-week, 8-week, 13-week, 17-week, 26-week | Weekly |
| 52-week, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, 30-year | Monthly |
| 5-year TIPS | Four times a year (April, June, October, December) |
| 10-year TIPS | Six times a year (January, March, May, July, September, November) |
| 30-year TIPS | Twice a year (February, August) |
The exact dates are published in the Tentative Auction Schedule from the U.S. Treasury. The schedule lists three dates — the Announcement Date, the Auction Date, and the Settlement Date. You only need to pay attention to the first two dates to know the window for placing your order.
You place your order between the afternoon of the Announcement Date and the night before the Auction Date. For example, if you’d like to invest a sum of money for two years, the schedule shows a 2-year note will be announced on a Thursday and it will be auctioned the next Tuesday. You will see it offered at your broker in the afternoon on the Announcement Date (Thursday). You should have your order in by Monday night, before the Auction Date (Tuesday).
So check the sale schedule and set a calendar reminder for yourself to place the order within the order window. If the term you want isn’t available as a new issue or if you don’t want to wait, you’ll have to buy it on the secondary market. See How to Buy Treasury Bills & Notes On the Secondary Market.
When It Matures
If you hold the Treasury to its maturity, you don’t have to do anything extra. The face value will magically appear in your brokerage account as cash when the bond matures.
Some brokers offer an optional “auto roll” feature for reinvestments. If you enable the “auto roll” feature when you buy the Treasury, the broker will automatically use the money from the matured Treasury to buy another new-issue Treasury of the same face value and the same term.
Selling Before Maturity
If you need to sell before the Treasury matures, you can try to sell it online at any time through the broker. The price will be at the market price at that time, which may be higher or lower than your original purchase price.
Sometimes bond dealers aren’t interested in buying from you when you have less than $100,000 in face value to sell. If you see that online prices require a higher minimum than the amount you have, you can wait an hour or two to see if a quote for a lower minimum comes up. Or you can call the broker and ask for help from the fixed income department. They have additional ways to sell the bonds for you. You may have to pay a fee for the broker-assisted trade.
Selling before maturity in a taxable account can make your taxes more complicated. Try to avoid selling before maturity in a taxable account.
Taxes
When you buy Treasuries in a taxable brokerage account, the brokerage firm will send you the necessary tax form for your taxes after the end of the year. The gains are taxed as ordinary income, not as a capital gain. If you do your taxes with tax software such as TurboTax, the tax software will handle the tax calculation. You only pay federal income tax on the interest. The interest income on Treasuries is exempt from state and local taxes.
When you buy Treasuries in a tax-advantaged account such as a Traditional IRA, a Roth IRA, or an HSA, the tax treatment goes by the account type. The interest isn’t immediately taxable. The eventual withdrawals will be subject to the usual rules and restrictions associated with the account type.
Online Brokers
Major online brokers offer new-issue Treasuries without fees. Click on the link to jump directly to the section for the broker you use — Fidelity, Vanguard, Charles Schwab, and TD Ameritrade.
Fidelity
Here are the steps for placing an order for new-issue Treasuries with Fidelity.
Under News & Research on the top, click on Fixed Income, Bonds & CDs.
Click on the New Issues tab. You pay no extra fee only when you buy a new issue (you must pay a bid/ask spread when you buy on the secondary market).
You’ll see a list of upcoming issues in the Treasury section. If you don’t see anything for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window. If you don’t see the new Treasury offered on the Announcement Date, wait a few more hours. It’ll show up later in the day.
You’ll see the maturity date of each issue and an expected yield. The expected yield is only an estimate. Ignore the estimate. You’ll get the actual yield from the auction. You won’t know what it is until after your order executes but you can be sure you’ll always get the best yield determined by the market. Click on Trade to buy the issue you are interested in.
You may see either the “old” order entry screen or the “new” order entry screen next. Either one works. Only the look and feel are different.
Treasuries are sold in $1,000 increments in a brokerage account. Enter a quantity of 1 if you’d like to buy $1,000 in face value. It will cost slightly less than $1,000 when it’s all said and done. Fidelity lets you set up Auto Roll to automatically buy another Treasury of the same term and the same amount when this Treasury matures. It’s convenient when you’re investing in short-term Treasury Bills.
If you turn on Auto Roll, when it’s time to roll to the next one, you may receive an email saying you don’t have enough cash in your account to cover the new purchase. Don’t worry. The matured Treasury will cover the new purchase just in time. See comments from Mapleton Reader.
Again, there is no fee whatsoever from Fidelity when you buy new-issue Treasuries (you must pay a bid/ask spread when you buy on the secondary market). Have cash ready in your account. You’ll have Treasuries when the auction settles.
Vanguard
Follow these steps to buy new-issue Treasuries in a Vanguard brokerage account.
Click on the three dots next to Transact near the top right of your account and scroll toward the bottom. Click on Trade bonds or CDs.
Click on the Treasuries tab and then the Auction radio button. Be sure to select “Auction.” You pay no fee or bid/ask spread only when you buy a new issue (you must pay a bid/ask spread when you buy on the secondary market).
You will see a list. The Treasuries 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 within your order window. If the Buy link isn’t activated yet on the Announcement Date, wait a few more hours. It’ll show up later in the day.
Vanguard shows an Indicative Yield on the right. That’s just an estimate. Ignore the estimate. You’ll get the actual yield from the auction. You won’t know what it is until after your order executes but you can be sure you’ll always get the best yield determined by the market.
Vanguard goes by the face value on the order page. Your order amount must be in $1,000 increments with a minimum of $1,000 and a maximum of $5 million. Vanguard doesn’t offer the Auto Roll feature. Similar to Fidelity, there is no fee whatsoever from Vanguard when you buy new-issue Treasuries (you must pay a bid/ask spread when you buy on the secondary market).
Charles Schwab
You can buy new-issue Treasuries at Charles Schwab as well. There is also no fee whatsoever from Schwab (you must pay a bid/ask spread when you buy on the secondary market). I don’t have an account with Schwab but a reader sent me these screenshots from their account.
Click on Trade in the top menu and then Find Bonds & Fixed Income.
Click on New Issues.
Choose Treasury Auctions in the Bond Type dropdown.
You will see a list of issues available for new orders. If you don’t see anything for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window. If you don’t see the new Treasury offered on the Announcement Date, wait a few more hours. It’ll show up later in the day.
Your order must be in $1,000 increments. If you turn on the Auto-Rollover feature, Schwab will automatically enter a new order for the same term and the same amount when this Treasury matures. If you leave the Auto-Rollover feature off, you’ll just have cash when this Treasury matures.
Charles Schwab limits the Auto-Rollover feature to Treasury Bills with a maturity of six months or shorter. There’s a one-week gap between the maturity of a Treasury Bill and buying a new Treasury Bill with the proceed. Fidelity doesn’t have this six-month limitation or the one-week gap.
TD Ameritrade
TD Ameritrade has been acquired by Charles Schwab. It still has its own interface for now. I don’t have an account with TD Ameritrade but reader David gave these steps in a reply to comment #101:
Trade -> Bonds & CDs
Click on any % link. From the left menu select “New Issues”
Under Treasury Auctions, click to show all.
The bills and notes are listed, showing you when the auction date is. You can put in your order the day before or morning of the auction date.
E*Trade
E*Trade’s commission schedule says their fee is $0 for buying new-issue Treasuries but I don’t have screenshots of how to do it because I don’t have an account with E*Trade.
Merrill Edge
Merrill Edge doesn’t support buying new-issue Treasuries online. Their fee schedule says that placing an order by phone with a representative costs $30 but people have reported not being charged a fee. Confirm with the representative that you won’t be charged a fee if you decide to buy by calling in.
You can buy Treasuries on the secondary market online without a fee at Merrill Edge. See How to Buy Treasury Bills & Notes On the Secondary Market.
Auction Result
Because I know I’ll get the best yield in an auction and it’ll be water under the bridge post-auction anyway, I don’t bother to check what exactly the yield was after the auction. If you’d like to know what you got from your purchase, you can check the auction result after 2 p.m. Eastern Time on the Auction Date on the Announcements, Data & Results page at TreasuryDirect.
The results for Treasury Bills (1-year or shorter) list a High Rate and an Investment Rate. The two numbers are just different calculations for the same result. The Investment Rate is comparable to the Annualized Percentage Yield (APY) on a commercial CD.
The results for Treasury Notes and Bonds (2-year or longer) list a High Yield and an Interest Rate. The High Yield is the yield you got from your order. The Interest Rate is the annualized rate at which you will receive interest payments every six months. If the Interest Rate is 4%, you will receive $20 in interest for each $1,000 face value every six months ($1,000 * 4% / 2).
***
Buying new-issue Treasuries in a brokerage account comes down to:
- Check the current rates and decide how long you will invest the money.
- Check the auction schedule to see when the next sale for your desired term will come up.
- Set a calendar reminder to place your order within the order window.
- Have cash ready to go in your account.
- Place your order. Wait for the auction and settlement.
- Check the auction result only if you’re curious.
- (2-year Treasury Notes and up) Automatically receive interest as cash in your account every six months.
- Automatically receive the face value when it matures.
You can also buy “pre-owned” Treasuries on the secondary market but you’ll have to pay a bid/ask spread there. You’re better off waiting for a new issue unless the term you want to buy isn’t available as a new issue — for example, no 9-month or 4-year terms are offered as a new issue — or if the next auction for a new issue is too far off in the future. Please read How to Buy Treasury Bills & Notes On the Secondary Market if that’s the case.
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Wise Money Tips says
The lower investment minimum and state tax free status can be deciding factors when comparing Treasury bills vs CDs. Not to mention the higher liquidity of the t-bills.
Walt says
I checked Fidelity just now. There are no Treasurys available. They probably sold out. I will contact Fidelity to see when new ones will be available. I am surprised at the attractive yields. Thank you for the information.
Harry Sit says
The U.S. Treasury currently announces new 3-month and 6-month bills on Thursdays for sale on the following Monday. New ones will show up at that time. You place order between Thursday and Sunday.
https://www.treasurydirect.gov/instit/annceresult/press/press.htm
Harry Pierson says
Treasuries NEVER sell out, the order you place through Treasury Direct or a broker for auction are “non-competitive” bids, which are always a tiny fraction of the auction.
As the other Harry said, Fidelity (and Treasury Direct) only accept orders during the period between the auction being announced, and the date of the auction (which usually closed 11AM or earlier)
You can find announcements at this link:
https://www.treasurydirect.gov/instit/annceresult/press/press.htm
Bob Groden says
Thank you for the info. Much appreciated.
DJ says
Thanks for the valuable information — it is certainly more useful than bank CDs.
Is there a way to know when the auctions are being done (or when it goes live), and when they would be available for purchase in the brokerage account? Especially for the 4 week t-bills.
Harry Sit says
See the link in reply to comment #2. I will add it to the post shortly.
Mimoza says
This is great info, thanks for sharing. I hope Schwab is as easy as Fidelity.
Questions: Fidelity will send you 1099-INT or something else? Would this mean the money you paid for the your 6 month bonds were equal to $1k minus 1.873% and Fidelity withdrew your $ AFTER the auction closed on Monday?
Thank you.
Harry Sit says
It’ll be a 1099-OID, which works similarly as a 1099-INT. Tax software will take care of it. 1.873% was the annual yield for a 6-month bill. The actual price paid was $990.74833 for each $1,000 bill. You just make $1,000 available as cash in your account for each $1,000 bill you order. When the auction closes, Fidelity deducts the right amount from your cash. You will have a little bit left over.
Serbeer says
What if for whatever reason you need your money back earlier than maturity time? With CDs, you can pull out losing certain amount.
Harry Sit says
Paying an early withdrawal penalty on a 3-month or 6-month CD would make it really not worth it. So if you can’t commit to 3 months or 6 months you are better off with a savings account or money market fund. You can sell the Treasury bills if you have to. I don’t plan on it but it can be done.
Harry Pierson says
As the other Harry said, if you are worried about having to withdraw your money within 3-6 months of purchase, don’t buy Treasuries, leave it in a money market.
Treasury securities are very liquid, and can be easily sold through any broker. If your Treasury securities were purchased at Treasury Direct, they will transfer them to your broker of choice at your request, for no fee
Mimoza says
Harry,
So if I’m not a tax software user, would I report the treasury bill interest together with CD interest on Schedule B that is carried over to Line 8a of 1040?
Harry Sit says
Yes. Look for 1099-OID in Schedule B instructions and in IRS Publication 550.
Harry Pierson says
If you don’t use tax software, but file state and/or local returns, make sure you find the right place on the state/local forms to deduct the interest paid on Treasury securities.
that interest is NOT taxed by either the state or local governments.
If you use tax software, and you filled out the Federal return properly, that will correctly flow through to you state return
Javier says
I have been looking for a place to “park” some money for a short period of time. This seems to be that vehicle.
Harry Pierson says
You can even purchase 4 week and 8 week Tbills, in addition to the more common 3 month and 6 month
vikash says
Hi Harry
this is great. Thank you!
Can you post one article on which platform to use for IPOs?
Regards
Vikash
Harry Sit says
Sorry, no idea. I never bought one.
Aks says
May I ask why you choose 6 month T-bill vs 4 weeks T-bill with renewal option?
With interest rate on rise, you could have capture future rate hikes by buying renewable 4 weeks T-bill vs 3 or 6 months T-Bill?
Harry Sit says
I would think the smart people who bid millions on these bills know more than I do. Their collective actions determine the current rates. It’s not clear to me how to turn off the auto roll when I need the money. Maybe it’s just an easy phone call. I just chose to keep it simple to match the timeframe when I will need the money. You can try the auto rolling 4-week bills and see what happens in six months. I don’t think there is a clear winner at the outset.
Aks says
Yes, there is not much to loose within your small time horizon.
BTW, you can cancel the auto roll option under the “Positions” tab on Fidelity.com
When you click in the investment in question you will see an option to “Cancel AutoRoll”
Harry Sit says
Thanks! That’s easy. When your timeframe isn’t clearly set, you usually still will know a little bit ahead of time when you will need the money. So you can just set the auto roll on 4-week bills and cancel when necessary. I will try that with some other money.
Mapleton Reader says
I’ve used auto-roll at Fidelity in the past. It worked ok but there is one thing to be aware of (unless it changed since I last used it over a year ago).
If you “park” most of your accessible cash in a treasury bill with auto-roll, Fidelity bids on the next batch of treasuries for you to minimize the lag in time where you receive no interest on your money (this is good). However, Fidelity checks to make sure you have enough money in your account to cover the new order and finds that you don’t – most of your money is still tied up in the existing treasury bill(s). You get a scary sounding notice saying you have insufficient funds to buy the new bill and you should deposit more before a certain date or “bad stuff” happens. If you ignore the letter, all works out in the end because Fidelity gets the money in time from the redemption of the lapsing T-bill just prior to the purchase date for the new one.
Jim Davis says
Well, the 6 month bill pays more NOW, so it will probably be very close to the same return for rolling 4 week bills for 6 months, given some rate increases during that timeframe.
cynicalanddisgusted says
I-bonds currently pay 2.58% and must only be held for one year.
corndog says
Also, I-bonds have a penalty of 3 months interest if you withdraw before 5 years.
https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
Raj says
What time are the bills available on Monday? I am on west coast and could buy only 4 week bills?
Harry Sit says
Brokers can’t take orders until the Treasury Department officially announces the bills for sale. A recent announcement of the 4-week bill was made on Monday at 11:00 a.m. Eastern Time. So I would give it another hour and try at 12:00 pm Eastern Time (9:00 am Pacific). If you still don’t see it by then, try again shortly before 4:00 pm Eastern Time (1:00 pm Pacific).
Harry Sit says
It’s 8:45 am Pacific Time on Monday. I see the 4-week bill available at both Fidelity and Vanguard.
Raj says
Sorry I meant to be looking to buy 3 month or 6 month bills. Don’t see them just the 4 week bills.
Harry Sit says
The 3-month and 6-month bills come out on Thursdays. You place orders between Thursday and Sunday. By Monday morning it’s usually too late. Check again on Thursday around 9:00 am Pacific Time for the next round.
Raj says
My Thursday order got executed today. Thanks
YK says
Great info! Much appreciated.
Wogga says
Maybe it was mentioned above, but just in case you missed it too:
Tbills and US government obligation income is NOT taxable at your STATE level. This makes them particularly interesting if your alternative is a CD or high yield bank account that you would have to pay tax on in a higher tax state. The interest is still taxable at the federal level, but in MA for example, it means saving the 6.25% (5% for MA banks) income tax on the money you made from your investment.
caray says
Thanks for all the tips. And now I see that I should order my 13 week and 26 week T-bills today (Sunday) and that otherwise they might disappear tomorrow as that is the actual auction day. Never would have known otherwise. I was seeing the issue date (or settlement date shown by Fidelity) of 6/7 (Thursday), thus my confusion.
I was also wondering why I didn’t see any 4-week new issue T-bills, but your article explained that too.
The mechanics looked pretty straightforward, just some things were a bit mysterious so I appreciate your article. BTW – I’m going to turn on the rollover feature. It looks straightforward to stop.
Jim W. says
Very informative article. Thanks!
For 3-month bills sold on Monday, “You place your order between Thursday and Sunday.”
Some clarification please…
Does “between” mean excluding or including Thursday and Sunday?
Or, in other words, what is the latest day and time to submit an order?
Thanks.
Jim
Harry Sit says
Including both Thursday and Sunday.
Carey says
Right, you can place your order on Sunday, no problem. The auction occurs on Monday at 11:30am Eastern Time, or around that. Not sure if you have time to place an order first thing on Monday.
DJ says
Hi Harry,
I have seen there are some differences between the prices at auction vs the prices for the same treasury bills in secondary markets. Sometimes, the secondary markets will offer a slightly better price than the one I get at the auction.
Is there a difference in purchasing T-bills directly from auction vs from the secondary markets? Is the T-bill interest still exempt from state taxation if the T-bill is purchased from secondary markets?
Thanks,
DJ
Harry Sit says
Just like stock prices, prices for Treasury bills also change by the minute (or by the second). There will be different prices for different Treasury bills of similar maturity and there will be different prices for the same Treasury bill at different times. Buying at the auction ensures that you pay the same price as big banks pay. On the secondary market, you will pay a higher price than big banks when you buy a tiny quantity. For the amount I buy, I always buy at the auction. The interest is still exempt from state income tax wherever you buy.
DJ says
Thanks for the clarification, Harry!
GO says
If you purchase bills, notes or bonds in the secondary market, I remember reading an article from another source saying you will have to pay State/Local taxes.
Danita L Cronkhite says
Harry,
We are looking to invest a small amount of money $3k for our deceased son’s two children. Would you say that T-bills, bonds or CD’s would be a better investment for them? The oldest child is 10 1/2 the younger is turning 8 in Nov. We would like to avoid them paying as much in taxes on the money as we can, and would like to keep it out of the hands of their mother, who is notorious for taking the money they are sent. Any suggestions?
Harry Sit says
For what purpose and for how long? If for college, you can set up a 529 account with you as the owner and each grandkid as the beneficiary. If for general spending, you can set up a UTMA account with the grandkid as the owner and you as the custodian. The child’s mother doesn’t have any control over these accounts. Within the account you can decide on what to invest in, T-Bills, bonds, CDs, or mutual funds.
Truman Kover says
Harry,
That was a very good article on how to buy Treasury bills. The screenshots were very helpful to explain the practical details.
Question: When it’s time to roll a T-bill, how can I change the principal amount? For example, suppose a $3k bill will mature in a few days, and I want to roll it into a new $2k bill. How do I set that up?
Harry Sit says
I think you will have to disable auto-roll and place a new order. If that’s the only money you have, you will have a gap of one week, which isn’t a big deal. After your $3k bill matures, you place a $2k order for the new bill to be issued in the following week. During the one week gap the money still earns interest in a money market fund.
Rich says
Harry,
I have a question about if/when to construct a TIP ladder. I’m 57 with about $100k recently inherited burning a hole in my pocket. Do I dollar-cost-average that money into my diversified mutual fund holdings (80% Stocks/40% bonds, to simplify) or would it be reasonable for me to build a TIPS ladder (10 year? 15 year?) now for payout when I’m between 67-70 years old? (I am hoping not to collect Social Security until I’m 70)? I have no company pension or other annuity. Is this a reasonable idea? Smart strategy? I’m not sure if the current rising-rates environment lately makes this plan less ideal than a few years ago. Should I just create a CD ladder? I don’t need the money now, by the way. Thanks for your thoughts.
Harry Sit says
That will take a whole new blog post. The short answer is yes a TIPS ladder is reasonable under a “safety first” approach, better than a CD ladder when you are targeting 10-15 years out, but I would try to do it in a tax advantaged account due to nuances of tax reporting when you hold individual TIPS in a taxable account. Simply investing in a diversified portfolio is also reasonable, under a different “probability-based” approach.
Rich says
Thank you! (And I think a whole blog post about this topic would be fantastic!).
I’ve been reading William Bernstein’s books (all of them, lol), but I see some financial blogs showing some TIPS in their asset allocation but not ladders per se.
I’m assuming a TIP ladder is a very conservative approach (and should be included in your total holdings’ bond percentage), so maybe not for everyone. But it sounds appealing to me to be guaranteed some return on my money along with the return of my money.
Does this rising interest rate environment mean I should set up this ladder sooner rather than later, or drag my feet and add a few rungs every year for a few years as I build it out?
So many questions, sorry. And thank you again for your answers.
Rich
Harry Sit says
Today’s bond prices already reflect the market participants’ collective estimates for the future in “this rising interest rate environment” such that no easy actions would be obvious. Otherwise they would take those easy actions and not pay the prices we see today. You and I won’t be able to figure out something more clever. If one way works better than another in hindsight down the road it would only be by chance.
Carolyn says
Thank you so much for this article. It helped me purchase some Treasuries via Fidelity. Your detailed description with graphics really helped!
Steven says
Thank you for this very informative information. I spent most of the day researching high yield savings accounts from online banks, when I read a comment on one site that mentioned looking into rolling short term T Bills as an alternative, due to the (state) tax benefits.
I found your article after a search on the subject, and greatly appreciate your providing this detailed analysis, especially as a fidelity account holder..
I like Fidelity’s customer service, and already receive year end tax statements from them, so this seems like a perfect alternative in this rising interest rate environment.
Jonathan Fox says
I was looking at this issue earlier today. I think I’m right in saying that (as a NYS taxpayer at 6%) I can get the same net return on a 3% CD with a 2.7% T Bill.
James says
Harry, looking at some other platforms, it looks like the bonds you are referring to are also known as Stripped Bonds. Is that accurate?
Thanks for the post!
Harry Sit says
No they are different. Treasury Bills are issued by the government with a maturity in one year or less. Stripped bonds are those originally issued with a longer maturity, that pay interest every six months, but someone took away (“stripped”) the interest payments and only let you have the principal instrument. Treasury Bills are much more straight forward.
Susan says
James and Harry, I think James is right. In your screen shot Harry, you show Treasury Zeros, also known as strips. In my Fidelity account, there are only Zero bills in the list for sale. Plain vanilla conventional coupon treasury notes are sold, but not shorter term bills.
In Annette Thau’s The Bond Book, she says “investing small sums in zeros can be expensive. Markups are high and vary a great deal from dealer to dealer. If the maturity of the zero is short (under five years), the conventional coupon Treasury may actually be the better buy.”
However, it is difficult to see what the markup is. Harry – do you ever compare the Treasury Direct auction price to the Fidelity auction price?
Thanks for your blog, Harry. Very helpful. Love the step by step.
Harry Sit says
No, the screen shot shows Treasury Bills. Treasury Bills by definition have no coupon. Fidelity is redundant by saying “TREAS BILLS ZERO CPN” in the description but it’s technically correct. These bills don’t have coupons but they’re not Treasury Zeros or strips. Treasury Zeros or strips aren’t sold in Treasury auctions. Only Treasury Bills and coupon notes and bonds are sold in new issue auctions.
The auction price is the same everywhere. Try a $1,000 order on a 4-week Treasury Bill at both Fidelity and TreasuryDirect and see for yourself.
Susan says
I see! Thank you! I misunderstood the title of the product. Thanks for the clarification. That clears up my worry that I had just invested in zeros. 🙂
D says
I bought T-bills at Fidelity and the whole procedure was quite straightforward. I heard that the Treasury Direct online site is quite clunky. I also do not like to open/keep too many accounts. Is there any way to buy I-bonds at a brokerage house such as Fidelity?
Harry Sit says
No, only TreasuryDirect or paper bonds from tax refund.
David says
Thanks for putting up this how to page. I noticed in your screen shots for purchaing tbills at Vanguard it does not show the expected yield. How would someone know what the expected yeidl would be at the time of the purchase?
Harry Sit says
The Daily Treasury Yield Curve Rates link in the fifth paragraph.
MC says
Very useful information. Thank you for taking your time posting this.
Andy says
Thank you for this extremely useful information. I am very grateful to your work.
DR says
Why is the percentage rate earned 0n 3 month bills purchased thru your brokerage account less (around 1.6%) than the current published rates of which are around 2.4% for 3 month bills?
Harry Sit says
Because the rate was lower when I bought last year.
DR says
Thanks for your responce. If I buy 3 month treasury bills thru broker now will I get the current published rate (around 2.4%)?
Harry Sit says
Yes.
Tom says
What is wrong with buying BROKERED T-notes and T-bills from Vanguard? There is no fee involved and you can ladder them very easily since there is many different maturity dates. True you could lose money if forced to sell before maturity in a down interest market but if you ladder efficiently, this should not be a problem. I mention this because you talk about only buying NEW Treasuries as opposed to BROKERED Treasuries. Maybe I’m missing the point. Please enlighten me if so.
Thanks…
Harry Sit says
What you call “brokered” Treasury Notes and Treasury Bills are usually referred to as buying on the secondary market. When you buy on the secondary market, you pay a slightly higher price than the true value. For instance, the market is open now and I’m looking at price quotes from Vanguard for a Treasury note maturing in six months on 10/31/2019. If I buy it now, I will have to pay $9,941.40 per $10k in face value. If I own it and I’d like to sell now, I will receive $9,936.30 per $10k in face value. The true value is somewhere in between. Let’s say you pay $2 extra for every $10k in face value. If that extra $2 per $10k is small enough for you, you can certainly buy on the secondary market through Vanguard.
When you buy new Treasury notes or Treasury bills at the initial auction, you pay the same price for your $10k order as financial institutions for their $100 million order. If we are talking about 3-month and 6-month Treasury bills, a new auction comes up every week. You never have to wait long. That makes it unnecessary to pay extra to buy on the secondary market unless you absolutely must buy today versus next week.
Auctions for longer maturities come up less frequently, and they don’t sell any new 8-year notes. If you don’t want to wait and you don’t mind paying a small markup, or you must have a specific maturity to build a ladder, buying on the secondary market is certainly an option.
Tom says
Thank you. I knew a small markup was factored into Brokered Treasuries but didn’t know how much. $2/10k is worth it to me to set up the laddering I wish. Appreciate your response.
Jesse says
I have a note due to me in August, 2019 for $1,000,000.00 what is the maximum amount you can buy in T-Bills?
Harry Sit says
You can buy up to $5 million with the steps outlined here.
Ramona says
Second week of June 2020 i will have around 60k to invest in bonds. I am considering building a 4 week Fidelity auto rolling tbill ladder. How do I purchase new auction tbills so 20k matures weekly? (Or perhaps 8week tbills maturing every two weeks?
Thank you!
Harry Sit says
With $60k you can have $15k mature weekly or every two weeks, not $20k. You need to place orders for 15 bills four times, every week or every two weeks on Wednesdays. For example:
June 17 – buy 15 bills
June 24 – buy 15 bills
July 1 – buy 15 bills
July 8 – buy 15 bills
Jim Willis says
When I look at the listing of new-issue T-Bills on the Fidelity website, I see 13-week bills and 26-week bills. I do not see 4 or 8 week bills.
However, the 4 and 8 week bills are available at the Treasury Direct site.
Harry Sit says
Look again on Tuesday afternoon or Wednesday after Treasury makes the official announcement.
Ramona says
I called Fidelity yesterday, dividends move to the sweep account rather than compounding on the tbill. Also, I asked about the past 12 months rate of return, sadly it’s was only 1.something. Now I’m reconsidering initiating the tbill ladder. What are the positives moving forward with the ladder?
Harry Sit says
As an alternative to money market, online savings, or CDs for short-term savings:
– Guaranteed by the U.S. government; Can buy up to $5 million without worrying about FDIC insurance limit
– No state income tax
– Never falls behind the market rate
– Don’t need to open new account
At 1.x% yield, for short-term savings, compounding or not compounding makes little difference. Interest compounds in the money market fund in the sweep account.
Hoa Truong says
Is it tax efficient to hold Treasury Bills in a taxable account?
Harry Sit says
It’s slightly more tax efficient than holding CDs or leaving the money in a savings account because you don’t pay state and local taxes.
Bob says
Thanks! Another great article. If I’m reading the current rates correctly, it looks like the sweet spot is either 2 or 3-month treasuries. It gives you the flexibility to renew at higher rates. Currently, 1Y+ rates he longer terms are not attractive enough for the time commitment. Is it worth building a ladder out of 1m, 2m, 3m, and 6m treasuries?
Harry Sit says
Everyone sees the same rates. The rate curve is steep from one month to two years for that reason. I doubt you can gain much by targeting a sweet spot, but if you’d like to retain your option and only invest in 1-month through 6-month, you sure can.
DB says
Thanks for updating this post, Harry. What a re the advantages of buying in a brokerage compared to Treasury Direct account apart from Fidelity’s auto roll feature? Does Treasury Direct issue the necessary tax forms to help with the taxes?
BTW the link to auction schedule is out of date. The correct one appears to be https://www.treasurydirect.gov/instit/annceresult/press/press.htm
Harry Sit says
Thank you for telling me the problem with the auction schedule link. I had double-pasted the URL. Fixed now. The link you posted only lists upcoming sales in the next week. The link in the post includes schedules for the next few months.
TreasuryDirect issues the 1099 form if you buy regular Treasuries there. The advantages of buying in a brokerage account:
– Can buy in an IRA (not possible at TreasuryDirect).
– Can sell before maturity if necessary.
– One pool of money, not transferring back and forth.
– One consolidated 1099.
When you pay no fee and get the same yield, it’s just easier to keep everything in one place.
DB says
Thanks for enumerating the advantages of buying T Bills in a brokerage account compared to TreasuryDirect. Do T bills count towards the $500,000 SIPC coverage limit for a brokerage account? Can a brokerage mismanagement result in loss of T Bills in addition to other brokerage holdings? I ask because you mention the ability to buy up to 5M T Bills without worrying about FDIC coverage in response to one of the comments above.
Harry Sit says
Everything you hold in a brokerage account counts toward the SIPC coverage limit. I don’t worry about SIPC coverage when I use a mainstream broker such as the three mentioned in the post. If you feel safer with TreasuryDirect, use TreasuryDirect.
Fred says
Thank you for the article Harry. How do you look at Short Term TIPs such as VTIP (https://investor.vanguard.com/etf/profile/VTIP ) compared to T-bills in a taxable account that you plan on starting to deplete in about 12 months and it will be fully depleted over the course of the next 4 years? I have VTIP and, trying to keep things super simple, trying to see it it would make sense to sell VTIP and buy T-bills instead?
Harry Sit says
They’re not directly comparable. VTIP has inflation protection. Regular Treasury bills/notes don’t. You can switch to 1-, 2-, 3-, and 4-year TIPS if you want predictability in the values when you sell, but you’ll have to buy them on the secondary market. New-issue TIPS are 5-year and up. Or you can take your chance and stay in VTIP. It isn’t possible to tell which way will turn out better.
Cathy says
Harry,
Thank you for the super helpful article. I currently have my “cash” parked in Vanguard short term inflation protected security fund (VTAPX). With interest rates rising I have been loosing money. I am thinking about moving all into Tbills. What are the advantages? The cash is in a taxable account. I do not need the cash for a few years. Is it best to set up a ladder? Thank you for your insights!
Harry Sit says
You should probably just stay in the fund if you don’t have a set schedule to liquidate. See reply to Fred in comment #42.
Cathy says
Harry,
Thank you for the reply. Interest earned on my short term tips fund is not deductible from my state tax I must hold them directly. Would this change your recommendation?
Harry Sit says
Interest earned on a short-term TIPS fund is exempt from state and local taxes in the same way as directly held TIPS and regular Treasuries.
Cathy says
Harry,
Thank you! My tax preparer in Illinois told me it’s not. Can you point me to a publication I can take to him? Thank you!!
Harry Sit says
Fire this tax preparer because they don’t know the basics. You wonder what else they don’t know. If you must educate them on what’s taxable by the state and what’s not, they should pay you.
Anita says
Hello. I’m at Fidelity wishing to buy a 3 year treasury available yesterday, but when I try to buy, the CUSIP is grayed out. Any idea what that means? Thanks
Harry Sit says
It means you already selected it on the previous page and you can’t change it to something else on the order page. If that’s not the one you want, exit and select a different one.
ANITA says
Thanks Harry. Got it. I just place my order and all went well. Also learned that I’m able to invest my HSA in the treasury as well. Done. Now wondering if Merrill Edge is equally friendly. Long ago, I took your advice and invested in Merrill Edge in order to become Platinum Honors at B of A and get 75% bump on their credit cards. All that has been great. But wondering if I can buy treasuries at ME for 0 trade cost similar to Fidelity. Your advice is always great. Thanks, Anita
Harry Sit says
Merrill Edge doesn’t offer buying new-issue Treasuries online. $30 charge per trade if you do it through a phone rep.
ANITA says
Answering my own question. Merrill Edge charges $0 to buy treasuries, both initial auctions and secondaries, IF it is an online self-trade, i.e. not assisted by a broker. I started to make a buy out of my IRA account at ME and my only option was a secondary treasury. Since I don’t have a non-IRA there, I can’t test to see if they offer auction purchases for non-IRA account.
Do you have an opinion about buying initial vs secondary? eg. I see a 3-year treasury available on secondary, that was issued just 2 weeks ago. I’d like some of my IRA money to go to treasuries.
Thanks much, Anita
Anita says
sorry, my 2nd comment re: Merrill Edge crossed with your reply. (thanks for the reply). I looked at the Vanguard cost chart and it says $0 fee for BOTH initial auction and secondary, where your article says only initial. Is this a new cost chart, or am I looking in the wrong place?
Harry Sit says
This post is only about new issues, aka initial auctions. Buying on the secondary market gets more complicated. When a broker doesn’t charge a commission for a bond on the secondary market, the price they quote still includes a markup. Different brokers have different markups, whereas there’s no markup in new issues.
Anita says
Thanks much Harry… lots to learn here. I appreciate your great advice.
Anita
Pierre says
Hello, I am new into buying treasury bills. Once you reach the 12 moths of maturity , do you have to sell it? Or you are automatically paid your money back and receive your tax forms?
Harry Sit says
You’re automatically paid when the Treasury matures. The interest will be included on your tax form together with your other investment income.
abcd says
Please add Ally Invest to this excellent resource.
Harry Sit says
Ally Invest doesn’t appear to offer new-issue Treasuries.
Jos says
Excellent, actionable information. Kudos.
Jacquie Traub says
Harry, could you do an article on TIPS (Treasury Inflation Protection Securities)? Why do they have a negative return, with inflation so high? How does one make a return with these? Do you recommend them? Thank you. Love all your articles.
Harry Sit says
Will do. I wrote a whole book on TIPS back in 2010. I have a lot to say about TIPS.
Terri says
I second the request for an article like this one on buying TIPS.
Allison says
Thank you for this excellent resource. I used the original post back in 2018 to guide me through the purchase of Treasuries and now I am referring to it again. A question: on the “Rates in Recent Auctions” page at https://www.treasurydirect.gov/instit/annceresult/annceresult.htm
it shows a High Rate and an Investment Rate. Which is the rate we get on our Treasuries?
Harry Sit says
Both. They reflect the same reality with different methods for annualizing (360 days versus 365/366 days).
Jay says
If buying through Vanguard does the money come directly from your brokerage account, or can you have it deducted from your bank account? And if from the brokerage account, should the money be sitting in money market?
Harry Sit says
It comes from the settlement fund of the brokerage account. I don’t think your order will go through unless you have sufficient balance in the settlement fund (or have margin and sufficient buying power).
Beth says
Can Treasury Notes be purchased in a Schwab Roth account? Thank you.
Harry Sit says
Yes, follow the steps in the “Charles Schwab” section.
Rob I says
Great article. Great alt to Savings.
I checked the process on Vanguard and Fidelity and noticed slightly different estimated rates for the same auction. Fidelity a bit lower than VG. Will both brokers close at the same auction rate?
Harry Sit says
The estimates are only estimates. Everyone gets the same rate when the auction completes.
Brad Freeman says
I am new to purchasing Treasuries and want to thank you for clearly illuminating the process. One large benefit of Treasuries over CDs purchased directly from banks when held in IRAs is avoiding the paperwork and time delays in moving assets between custodial accounts at different trustees. I’m now in the process of transferring IRA HYSAs and CDs from multiple banks to brokerage accounts at Vanguard to purchase Treasuries and it’s taken several weeks so far. The banks have no incentive to speed up the withdrawal of money from their uncompetitive low interest paying accounts! Now that I see how to easily purchase Treasuries from a brokerage account, I won’t be going back to purchasing CDs directly from banks!
Jay says
If bought through Vanguard, the Treasury purchase will show up in my Vanguard Brokerage account once it settles, right?
RobI says
Yes I just did the same and it was very easy following the steps from Harry
Dee says
I have paper ibonds issued from my income tax refund in only my name but they have my spouse’s social security number. Is this a problem?
Harry Sit says
Not a problem. The last four digits of the Social Security Number printed on the paper bond only show which tax return it comes from. It has nothing to do with the bond registration. You can follow the normal process to deposit it into your online account without doing anything extra. See How To Deposit Paper I Bonds to TreasuryDirect Online Account.
Gina says
Just bought a 1 year Treasury bill at auction. I paid $978.77. Does that mean the interest is 2.123% ? Not sure whether to divide by the amount paid or the face amount. Also, if I were to buy at Schwab on the secondary market, what does accrued amount mean?
Thanks,
Gina
Harry Sit says
It doesn’t matter. The bottom line is that you paid $978.77 and you’ll get $1,000 back in a year. Whether you call that 2.123% or 2.169%, it makes little difference and it doesn’t change the bottom line.
Accrued interest is like the prorated property tax when you buy a house. When you’re going to get the interest payment for a full period, you owe a prorated amount to the previous owner. It’s small, but it unnecessarily complicates your taxes if you buy in a taxable account. That’s another reason I suggested sticking to new issues for simplicity.
Frank says
T-Bills, buy now or wait after Fed’s meeting on June 3?
I have to pay my son’s tuition in mid December. Currently the funds are tied in a Age-based mutual fund in 529 plan. I am thinking about withdrawing $25,000 from the 529 plan and buy 6 month T-bills. My question is if I shall buy it next Monday or wait until Fed Discount Rate increase which is most likely to be announced at next Fed’s meeting, June3? Any predication whether the 6 month T-bill interest rate will go up or down then?
Thanks
Harry Sit says
Look at how the rate changed before and after the last Fed meeting on May 4th when they raised the rate by 0.5%. The yield on six-month Treasury was 1.40% on April 26. It dropped to 1.37% on May 5, the day after the Fed meeting. A 0.1% change makes a difference of $5 per $10,000 invested. If it changes by that much and you predict it correctly, you make $12.50 on your $25k investment. Flip a coin.
dobbs says
hello harry, is it possible to buy 5, 10 year TIPS in an IRA held at Vanguard, via their brokerage, as one does for nominals?
if so any caveats?
PS: just got your book from 2010, still find Bond Calculation comparisions confusing , e.g. YTM for TIPS vs nominals, the “breakeven” percentages, typically used are both “real” or both “nominal” , etc
Do you *still own more TIPS than nominals?
Harry Sit says
Yes, you can buy 5- and 10-year TIPS in an IRA through Vanguard. My book shows the details. If you still find it confusing though, consider buying a TIPS fund or ETF as shown in this post. Let the fund management handle those calculations.
wogga says
Only semi-related comment, but hopefully useful: If any of you here haven’t put your $10,000 per taxpayer per year into I-bonds via treasurydirect — and you are OK not accessing your money for 12 months, seriously consider doing it. I don’t know what I was doing last Dec, or I could have put in $10K then and $10K this year, as rates have gone up. I believe the May+ 6 month rate (guaranteed by the treasury) is 8.62%. The rate could go down when they re-evaluate in the fall, but cannot go below 0%, so even if they didn’t pay you the 2nd half of your year’s I bond rate, you’d still lock in 4.xx% for the year, not bad for a US Gov’t guaranteed rate. The treasurydirect.gov website is clunky, but if you’re already buying other T-bonds and bills direct, you already have an account, which is half the battle.
Terri says
Hi, for 2 year notes, I only see floating rate notes on the auction schedule. Or am I missing something? I was thinking of making a ladder up to 2 or 3 years. Would I use a 2 yr FRN the same way as a fixed rate note? Or does the floating rate mean there’s no need to include shorter notes? Does the yield curve info for 2yr notes apply to the FRN?
terri says
My mistake, I blame it on my glasses! I see that there are both regular and FRN 2 year notes on the calendar.
Matt says
Hi Harry. Can you buy T-bills & notes in an IRA at these brokerages? If yes and I buy in my Roth, does that mean all the interest earned would be tax-free?
Harry Sit says
Yes, the process is the same in any type of account you have at the broker. The tax treatment goes by your account type.
Matt says
Thank you Harry for all your great work & timely responses.
BH says
I had the same question. Thanks Harry! Been following you for years and youre always so helpful and can break down (unnecessarily) complex topics in a way most cannot.
Going to execute this in my Roth IRA as this is a great “risk-fee” way to add more diversification.
John says
I just found out that if you want to buy Treasury Bills through Fidelity at the secondary market, the minimum purchase requirement is extremely high. I don’t know if this is true for other people.
Harry Sit says
Clicking on the Depth of Book icon will show you prices for lower minimums, but it’s just unnecessary to buy Treasury Bills on the secondary market. A new issue comes up every week. The minimum is always only $1,000. There’s never a bid/ask spread when you buy a new issue. At worst you wait until next week. Paying a bid/ask spread on the secondary market every month or every three months adds up fast.
John says
Thank you Harry for the suggestion! I will stick to the new issues.
Jesse Ash says
Thanks Harry for the very good information . I worked for The Federal Reserve Bank, Los Angeles Branch for 26 years. Back in the 70’s the lines would be around the block for for Treasury Bills, it would be nice if we could buy Treasury Bills and Savings Bonds direct from The Federal Reserve Bank.
Se says
The feds just did a rate hike today – 75 basis points. Is it a good time to buy 6-month treAsury bill? It was about 3% before will it be around 3.75% ? Have money waiting on Schwab – never did bond before. Planning to buy ASAP. Don’t want to put a lot of money 💰 and it be the wrong time. Thank you.
Harry Sit says
Check the rates tomorrow using the link in the post. The government sells new 6-month bills every week.
Jacquie Traub says
Hi Harry,
I know you update links and information in your articles at times. Are the rates in this article updated periodically or are these the rates from when the article was posted (April, 2022?) Thank you.
Harry Sit says
Rates in the table aren’t updated because they change daily. There’s a link in the post to check current rates.
SE says
So expected yield on 7/28/2022 for a 6 months is 2.90% ? Is that how it works? Seems like the expected yield is going down even though they just increased it 75 basis points? Thought it would go up. On Schwab it shows a new 6 month t-bill maturity on 2/2/23 that will auction on 8/1/22. From this link: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2022
Harry Sit says
That’s correct. Rates change daily. It’ll be around that number give or take.
S E says
Thanks. Purchased 6-month t-bill with no fee! Maxed out I-Bond last week. Not sure of any other safe, semi-liquid investments. Wish I could get better than 3% somewhere since inflation is over 9%! Thanks for the info.
Matt S says
Outstanding TBill advice here, Harry. I’ve learned so much from your site–I just ordered your Financial Toolbox book as well. Thanks so much.
joey says
any thoughts on just using money market funds vs. 13/26week treasury bills?
seems the extra basis points, might not be worth the effort for retail 4-5 figure investments ?
Harry Sit says
A money market fund or savings account offers daily withdrawal flexibility but a lower yield. It’s your call which you prefer.
James Bond says
One thing I observed – I am a US citizen, moved to a foreign country for work. In this case, Fidelity doesn’t allow me to buy “New Issues” with following error: “Your order cannot be placed. Because you or someone authorized to act on your account resides outside the United States, you are not eligible to participate in this new issue offering”.
So it seems the only other way for me to buy treasuries is secondary market. Please let me know if there are other ways I could participate
Wogga4eva says
Two ideas: one, call fidelity to get your trading set up in your current country. You may just have to tell them/sign something. If that doesn’t work get a paid VPN service/app like Hot Spot Shield , so you can turn that on, placing your browser / pc back n the USA before logging you into Fidelity.
James Bond says
It’s not about VPN. It’s because my company (it was the same company I was working in the USA) updated my mailing address in the Fidelity system. As the mailing address changed, they detected change in residence and restrict overall activity.
supersunken says
If you have a US address you can create any brokerage account, deposit money in and purchase treasury bonds. You don’t need to stick with Fidelity. Or you can change the address to a US address in your Fidelity account?
Zumwalt says
One issue I found using Schwab is that they insist on sending snail mail notifications of upcoming T-bill/note/bond maturations. There is no way to have these delivered electronically (according to several customer service reps who cite vague “regulatory requirements”).
I know Vanguard does not do this. Can someome let me know what Fidelity does?
Harry Sit says
Fidelity sends notices of maturing bonds electronically.
Kein says
Schwab *requires consent to electronic delivery* for some features. @ Zumwalt Did you ever get that paper firehose turned off?
Electronic delivery is best for me. Some older people I know like paper-only.
The legalese:
https://client.schwab.com/Areas/Trade/FixedIncomeSearch/FISearch.aspx/BondAgreement
an excerpt: “…
Consent to Electronic Delivery of Information
We will be providing you separately a “Municipal and Corporate Bonds New Issue Process Informed Consent to Electronic Delivery of Information”. Please review that consent form carefully and acknowledge your acceptance by clicking on “I consent”. When you click “I consent” in the consent form, you will be consenting to ongoing electronic delivery by Schwab of certain communications relating to use of the System and trading in Bonds, including communications relating to public offerings of Bonds and availability of Offering Documents, notices, regulatory communications, and any other documents needed to participate in electronic trading of securities and/or the offering process for new issue Bonds (collectively, “Information”).
If you do not consent to electronic delivery of Information, you will not be able to participate in new issue Bond offerings in the System. You may still participate in new issue Bond offerings with no additional fee by calling a Charles Schwab Fixed Income Specialist at OOO-OOO-OOO.
…”
alan 68 says
just curious, does this mean 1 snail mail per account, or for each bond ?
I, also have a Schwab brokerage, and was going to try it out for the rollover feature, maybe just at the 4 week auctions, the downside being another account to track, but maybe using Schwab over TD (where I also have an account) has an advantage.
Is it enough to open a fidelity account for this feature you would like, or maybe Fidelity has some benefits over Schwab/TD otherwise?
Josie says
Good day Harry. Thanks a lot for this article. I’m new to Treasuries so I’m sorry if this is a stupid question. I know you suggest new issues because of the zero fees, but if I were to buy them in the secondary market with Fidelity – when I look at the depth of book, I should be looking at the Ask price and if I were to sell I would be looking at the Bid price? Your website is very informative. I will be sure to check out your books later today.
Harry Sit says
That’s correct, and for the minimum number of bonds you will buy or sell. The price quote before going into the depth of book can be for a large minimum quantity.
Josie says
Thank you Harry. You’re right though. I think I will go with the new issue bills.
Allison says
Again, this is an excellent post. I purchased several Treasuries back in April 2022, as rates first began climbing up from ~zero. Obviously, rates are much higher now (Sep 2022). You’ve mentioned that Treasuries are easy to sell. I’m wondering if I should sell my 1+ year term Treasuries so I can buy some current Treasuries and take advantage of the new higher rates. I’m no math wiz so I’d love to have the opinion of someone smarter than I on this.
Question about selling: I found the Buy/Sell (Bid/Ask) page for my CUSIP 912796V48 on Fidelity’s website. Let’s say I purchased 10 Treasuries so I have ~$9,811 invested. Would my sell quantity be 10 (just like when I bought them)?
Harry Sit says
Usually there isn’t much to be gained by selling and rebuying versus only waiting to buy again when your bond matures. In order to profit from a trade, you’d have to have a different view on how it will play out in the future than the prevailing view of the bond market and it turns out you were correct and the market was wrong. You can sell if you need the money for something else but I don’t think trading will help. If you do sell, yes, the quantity will be the same as when you bought them.
Rick Whittington says
Thank you for this article, and your many articles on TIPS! Your straightforward guides gave me the confidence to rotate out of FIPDX and start purchasing individual TIPS. My first 5-year TIPS purchase started with CUSIP 91282CEJ6 re-auction back in April. Although I intend to hold all TIPS to maturity, I’m a little confused about how Fidelity reports cost basis on TIPS. Fidelity reports current market value of 91282CEJ6 as BELOW what I originally invested (which I understand given the dramatic rise in Fed interest rates). However, it also reports a cost basis several thousand dollars ABOVE what I actually invested. So, if this TIPS was maturing today, what would I receive back if the market value was below what I originally invested? Would I receive current market value, what I originally invested, or the Fidelity reported cost basis?
Thanks for helping me understand. You have a real talent for clarifying obscure topics!
Harry Sit says
91282CEJ6 was auctioned as a new-issue in April. It was auctioned again in June as a re-opening. If you bought in April, you should’ve paid $1,027.6745 per quantity of 1, which consists of $1,027.62649 for the bond and $0.04801 as accrued interest. You’ll be reimbursed for the accrued interest when this bond pays interest on October 15. What does Fidelity report as the cost basis? Divide the cost basis you see by the quantity to get the cost basis per bond.
If this bond matured today, you would receive $1,000 per bond times the index ratio plus the last interest payment. The index ratio for this bond as of today, 9/21/2022, is 1.04938. That means you would receive $1,049.38 per bond plus interest. The difference between this and the original $1,000 per bond in April represents the inflation adjustment since then.
Rick Whittington says
Thanks Harry. I purchased at both the April new issue and the June re-auction. I pulled the auction results of both from the Treasury Direct site and followed your instructions. It ties exactly to the Adjusted Prices and Adjusted Accrued Interest shown in the Auction Results, subtracted from today’s Inflation Protected Information tab on the Fidelity site for 91282CEJ6. The “Cost Basis” that Fidelity shows in my portfolio does not match any of this. However, they do have a footnote that says “Adjusted cost basis is calculated based on the IRS default methods or fixed income instructions provided to us. The adjusted cost basis may not reflect all adjustments necessary for tax reporting purposes. Refer to IRS Publication 550, Investment Income and Expenses, or your tax advisor for additional information.” I probably won’t refer to the IRS Publication, because I’m lazy and it’s easier to follow your method. Thanks again for your help, you do have a talent for clarity!
LK says
Hello Harry,
Great article. I am thinking of EARLY withdrawing a 2.5% 18 month CD (I am about 3 months in) to buy a 1 Yr TBill/Note at 4.00%+ yield. I am trying to figure out if this is a good idea? I plan to hold until maturity.
The penalty to withdrawal early is 6months interest. And they indicate what your early redemption total value would be. I am just having trouble doing the math and is this a good idea due to no state/local tax benefits (I live in NYC)?
The way I see it, I figure the forfeit of 6months interest would eventually be recaptured and the tax benefits are a plus for someone in NYC. And it is also 6 months earlier to maturity.
Let’s just say I’m doing $400k, and the total cost to redeem today is $2,840 (they include the forfeiting of the past 3 months interest in that calculation + 3more). I just hate to forfeit ~$2,800+ for doing nothing and realize I would forfeit any interest I that I have accumulated on money in last 3 months. How is this calculated into the equation? I would buy the bond in a brokerage account and hold to maturity. If I hold to maturity, it doesn’t matter if the value goes up or down in the interim right, my YTM will locked in? I see the value fluctuates if I want to sell in the secondary market.
Thanks for your time and advice!
Harry Sit says
If you’re sure you’ll hold to maturity, you will get a little more interest by breaking the CD early. If you do $400k, you’ll end up with about $2,500 more (before tax) versus staying in the CD for the remaining 15 months. It isn’t much percentage-wise (~0.6%) but $2,500 is still $2,500.
This is calculated quickly by the extra 1.5% interest being 60% more than the current 2.5% rate on the CD. So over the remaining 15 months, you’ll get 15 * 60% = 9 extra months’ worth of interest at the original 2.5% rate. After subtracting the penalty of 6 months, you have 3 extra months left. $400k * 2.5% * 3 / 12 = $2,500. This doesn’t include the difference in state and local taxes, which adds some more benefit to Treasury bills.
Yes, your yield is locked in if you hold to maturity. It doesn’t matter how the market value changes before then.
Wondering says
It’s a great explanation to LK’s inquiry. I have a further question. Is there an online calculator that would allow to perform such quick comparisons? I think it can be easily created on the Excel spreadsheet or Google Sheet. Your explanation actually gives an idea on how to possibly create it.
This article and comment thread will be a great study guide for me. I have always had regular CD’s (and I-Bonds) but with banks being either very slow or stingy to increase interest rates nowadays, I must learn about Treasury bonds/bills and brokerage CD’s that seem to offer higher rates. If I feel comfortable, I might start breaking my 5-year CDs that have been earning 3%, but they still have 1 or 2 years to go (so like LK I must calculate when it’s worth it to break my old CD’s, though luckily I’m not anywhere close to having $400k in cash).
Are there pros and cons between these two categories? I think one pro for Treasuries is that people don’t pay taxes on the state level, only to the IRS, but with CD’s, one must pay taxes on interest to both federal and state governments. Am I correct?
A month or so ago while exploring my taxable account at Schwab, I managed to find Fixed Income section, but I was surprised to see a brokered CD in USD from some Israel bank (it was in the title of the CD), but when I clicked on it, it said “FDIC Insured.” How can it be? If I bought it, would I also get entangled in some paperwork complexities and pay taxes to Israel as well?
Since people are feeling a rush to jump to bonds, Treasuries, and CD’s (brokered or regular), what should they be concerned about to prevent mistakes? Any advice?
For example, as I found this CD from Israel (almost 4% for 1 year), it sounds great, but heck, if I get more paperwork to do or file something in another country, etc. I don’t think the little extra interest earned on it overweighs the hassle of filing taxes. I could be wrong, so I’m wondering now.
Harry Sit says
If the remaining terms match exactly, i.e. 2 years left on the CD, replacing with a 2-year Treasury, you can use the “break CD calculator” from depositaccounts.com:
https://www.depositaccounts.com/tools/break-cd-calculator.aspx
It doesn’t account for the difference in tax treatment. Yes, you must pay both federal and state (and local, if applicable) taxes on the interest from both direct CDs and brokered CDs. You only pay federal tax on the interest from Treasuries.
A brokered CD from an Israeli bank is from the U.S. subsidiary of the bank in Israel. That’s why it still has FDIC insurance. You don’t pay tax to Israel. However, almost 4% for 1 year is no longer a good rate when 1-year Treasury yield is already above 4%. Treasuries are directly guaranteed by the U.S. government. You also save on state and local taxes.
Bill says
Hi Harry
Where I can see that 1 year above 4% for treasuries ?
Thanks
Harry Sit says
The “Current Yield On New-Issue Treasuries” section in this post.
Frank says
I-Bond or 1-year treasury
I know it is still too early to know the upcoming I-Bond yield. There are two rate increase cycles for the this year. Is it possible that 1 -year treasury yield reach 5% by Jan 2023? If that is the case, does it make more sense to invest in 1-year treasury than I-Bond assuming inflation peaked in August? Any educated guess?
Harry Sit says
Buy both?
Nancy says
Thank you so much for this post! I had some cash in IRAs at Schwab and Vanguard that I wanted to put to work safely and short-term, and Googling brought me here. Thank you for making it so easy to understand, and for giving the step-by-step instructions at each brokerage. It’s easy once you know how, but having your instructions made it go so much more quickly.
Frank says
3 month Treasury vs. 3 month CD?
I noticed on Fidelity site the 3 month CD rate offered by banks is higher than the Treasury? The only consideration is Treasury is state tax exempt. Has anyone done calculation to see which to buy?
Frank
Harry Sit says
To get the fully taxable equivalent yield of Treasuries, multiple the Treasury yield by this factor:
(1 – f ) / (1 – f – s)
where f is the federal marginal tax rate and s is the state marginal tax rate. For example, when the Treasury yield is 3.4% and you have a 24% federal marginal tax rate and a 6% state tax rate, a fully taxable CD has to have a yield of
3.4% * (1 – .24) / (1 – .24 – .06) = 3.69%
to beat the Treasury yield. And that’s considering holding both to maturity. If there’s any chance you will sell before maturity, you’ll take a much larger haircut in selling a brokered CD than selling Treasuries.
Jacob Olman says
Thank you for this – I am going to check on Fidelity tomorrow. What are your thoughts on laddering versus buying a 2 year fixed rate note with interest rates rising?
Harry Sit says
Buy whichever term you’re comfortable committing to holding to maturity. If you’re sure you don’t need the money for two years, buy the two-year note. If you’d like to retain the flexibility to do something else, buy a shorter term and see if any other needs come up when it matures.
Marc says
Hi Harry,
I’ve commented on your I Bond Article and now I’d like to ask a question about treasuries. In this article, you state: “When you already have a TreasuryDirect account for I Bonds, you can use the same account to buy regular Treasuries but it’s easier to buy them at a broker.” Why is it easier to buy them at a broker? Are there any disadvantages to buying them from TreasuryDirect? And last question. Will TreasuryDirect issue a 1099 for the interest to you and how is that done, somewhere within the site or will they email it to you?
Thanks,
Marc
Old mariner says
Hi, take a look at Harry’s reply to #41 above.
Marc says
Thank you, Old Mariner. I’m not sure the last two reasons are significant, but the first two are valid for certain folks and situations.
The advantages of buying in a brokerage account:
– Can buy in an IRA (not possible at TreasuryDirect).
– Can sell before maturity if necessary.
– One pool of money, not transferring back and forth.
– One consolidated 1099.
Matt says
Harry – How does the 7-day SEC yield on a money market fund compare to the investment rate on a T-Bill? Are they comparable? I have an account with Vanguard and I’m wondering if the 7-day yield is the appropriate comparison relative to a 4 or 8 week bill. Thank you.
Harry Sit says
They’re comparable. See Guide to Money Market Fund & High Yield Savings Account.
Ken says
Hi Harry,
I have a SDIRA LLC. I want to purchase 6 month Tbills for the time being. Can I open an IRA account at Schwab under the LLC name, fund it from my check book authority and buy the Tbills?
Also, am I able to roll the funds eventually from this Schwab account back to my SDIRA LLC to take advantage of the housing market at a later time?
Thanks,
Ken
Ken says
Bueller?…Bueller?…Bueller?…
Harry Sit says
An IRA can only be opened by an individual. You can open an IRA under your own name at Schwab and work with the custodian of your self-directed IRA to transfer part of your IRA to Schwab. This is the reverse of how you transferred your personal IRA into your self-directed IRA when you first created the self-directed IRA. When you’re done with the Schwab IRA, you can move it into the self-directed IRA again as you did it before.
Mary says
Why do you say to “ignore the estimate” given by Fidelity on new auction treasuries. I am looking at 2 month treasury at auction with a 3.37 estimate. I can buy today on the secondary market a 2 month treasury almost identical for 3.58 interest. That lower estimate concerns me. Any help appreciated. TIA
Harry Sit says
Because the estimate is far off from the actual result when the auction completes. The actual result may be higher or lower than the yield you see today on the secondary market but the estimate can’t tell you anything about which way it will go. Ignore the estimate. It’s woefully inaccurate.
Allan says
I have $1.0319 million to put into 6 month or 1 yr T-Bills in my IRA act. I would like to invest the complete amount with only a small fraction left over (<$1,000), but don't want to go over that amount. Vanguard requires $1000 increments. I don't want to purchase 1,031 T-bills because that will leave me with approx. $15K balance. Without knowing the exact amount of the T-Bill until the auction concludes, is there a way to make this purchase and end up with less than a $1000 balance?
Or, will Vanguard only allow me to order 1,031 T-Bills with the amount I have in my IRA settlement account?
Thanks.
Harry Sit says
You can buy 1,031 T-Bills at the auction and see how much money you have left when the auction completes. Then you can use the remaining money to buy into the same T-Bill on the secondary market. The bid/ask spread you’ll pay on this residual order will be small because the quantity is much smaller.
Yuriy says
Can I add my wife’s name to New Treasure notes?
How to add beneficiary?
Thank you.
Aks says
1. Follow Add beneficiary by following Add Registration steps below. Do NOT check “This is a Gift” box.
https://thefinancebuff.com/buy-i-bonds-as-gift.html
2. Then Edit your Treasure notes under current holding and select newly added beneficiary.
My question is how to add a beneficiary who is not a us citizen and does not have SSN? Is it possible?
Harry Sit says
I don’t know how it works for non-citizens. If it doesn’t work when you use an ITIN, please contact TreasuryDirect.
Harry Sit says
If you bought new Treasury notes in a brokerage account, all holdings in the brokerage account go by the ownership and the beneficiary set at the account level. You can’t and don’t need to add a joint owner or designate a beneficiary for each holding separately.
If you bought new Treasury notes in TreasuryDirect, the process is similar to adding a second owner or a beneficiary to I Bonds. See How to Add a Joint Owner or Change Beneficiary on I Bonds.
sudhir says
Thank you for very informative post. Can you please comment on pros and cons of bying 10 year treasury notes Our goal is to get 5-6% returns on our investment and live off those returns when we retire in few years. what happens to 10 year treasury note when fed lowers the interest rates?
william baldw says
any thoughts on just buying TBIL ETF , with expense ratio of 0.15%
instead of manually buying ST bills? VG doesn’t have the rollover feature, not sure if Schwab does (my other brokerage).
Harry Sit says
Schwab has the auto-rollover feature. See the Charles Schwab section in the post.
Jen T says
Hi, I have a Roth that I haven’t been able to contribute into for the last couple years due to a household income being over the allowed limit. Does that income limit apply when wanting to purchase treasury notes through a Roth? I gather from your article we aren’t held to the $6,000 contribution limit for an IRA either when it comes to buying bills and notes either? So I could buy a $10,000 treasury note in my Roth despite being a higher earner? Thank you for your great article.
Harry Sit says
The income limit stops you from contributing new money to your Roth IRA but it doesn’t limit how you invest the money already in your account.
David says
Hi Harry,
Great post. I wish I knew about treasuries years ago, I can’t imagine how much I have lost over years especially considering the tax savings!!!
With respect to taxes do you know if buying a treasury at discount and keeping it till maturity of over a year, would the gain be considered ordinary income or capital gain?
DB says
The discount would be reported as interest and is treated as ordinary income.
Marc says
Quick question, Harry:
Slightly off-topic but on a related matter, what’s the difference between the “High Rate” and the “Investment Rate” columns on the TD site that shows the last 20 treasury auction results? On the surface, the “High Rate” seems to be a misnomer since it’s the lower of the two posted auction result rates. What do they each mean and which do I get when I place an order for a give. treasury bill?
Thanks…
Marc
Harry Sit says
You get both. They are the results of different calculations based on the same reality, similar to how you measure the volume of liquid in liters or quarts. The Investment Rate is comparable to the APY number on commercial CDs.
Susan says
Did you post answer to:
“sudhir says November 1, 2022 at 11:52 am : question on pros and cons of buying 10 years treasuries?”
sudhir
November 1, 2022 at 11:52 am
Thank you for very informative post. Can you please comment on pros and cons of buying 10 year treasury notes Our goal is to get 5-6% returns on our investment and live off those returns when we retire in few years. what happens to 10 year treasury note when fed lowers the interest rates?
Appreciate you answer: What are your thoughts on buying laddered treasuries for cash position in Traditional IRAs vs. brokered CDs ? (We are are 71 & 77 yrs. old — have accounts at Vanguard and Fidelity)
DB says
>> what happens to 10 year treasury note when fed lowers the interest rates?
Their price will likely increase and they can be sold in the secondary market for a gain. If you hold them to maturity, then the interest changes do not matter and you will receive the full face value and the final interest payment.
Harry Sit says
Pros – You’ll have a Treasury note that pays a fixed interest every six months for 10 years plus the principal repayment on the maturity date. The displayed market value in your account will fluctuate during the 10 years but the principal and interest payments won’t change. You know exactly what you’ll get.
Cons – The interest payments and the final principal payment will be affected by inflation. You don’t know how much purchasing power the money will deliver. If you need more than the interest payments before the note matures, you’ll have to sell. The amount you’ll get from the sale may be more or less than the price you paid originally.
Brokered CDs don’t pay meaningfully more than Treasuries of the same term at this moment. Stay with Treasuries.
Allan says
On a 26-week T-Bill, what happens if you try to purchase the bills at Vanguard between 12:01am and 11:00am Monday morning, (auction day)?
Does Vanguard lock you out from submitting the order or does the order not go thru?
Harry Sit says
I’ve never tried entering an order that late. Pushing it down to the wire adds stress. Brokers have a cutoff time earlier in the morning than Treasury’s cutoff time to give themselves time to gather the orders and submit them to the Treasury. You won’t need to worry about making the cutoff if you put in your order the night before. If you must enter your order on the auction day, do it early in the morning and hope for the best.
Secilia says
I read this all a few times, but I cannot understand how to buy and T bonds. I tried, I really tried, so I will go to bank for some CDs
Harry Sit says
Something must be unclear. I’m trying to see what it is. What maturity are you interested in buying (3-month, 1-year, 2-year, …)? Do you have an account with one of the brokers mentioned here – Fidelity, Vanguard, or Charles Schwab?
Joe says
Can you add how to do this at TD Ameritrade? Thanks.
David says
Trade > Bonds % CDs
Click on any % link. From the left menu select “New Issues”
Under Treasury Auctions, click to show all.
The bills and notes are listed, showing you when the auction date is. You can put in your order the day before or morning of the auction date.
Harry Sit says
Thank you, David. I added these steps to the main post to make them easier to find.
Austin says
What is the interest rate of this T-bill?
17-week, CUSIP 912796Y78, issued on 11/01/2022, maturity 02/28/2023
There seem to be several different types of rates quoted in various places.
Which rate is the agreed official rate?
Where can I find this info?
Thanks
Harry Sit says
That’s an existing bill. You look up the Investment Rate on the day it was issued on the Announcement & Results Press Releases page at TreasuryDirect. Click on the PDF link under Competitive Results.
If you’d like to know the yield if you buy it on the secondary market today, you look for it at your broker. See How to Buy Treasury Bills & Notes On the Secondary Market.
Wogga4eva says
One answer to ‘what is the rate’ on this investment is that it depends on the price of the bond as well as if it might be called away from you by the issuer, the rate on the web live can be figured out by looking at ‘yield to worst’ (worst = if the bond were called away from you or to maturity, whichever is…worse). When the price of the bond is below 100 you will be getting a higher yield than stated in the bond’s issued rate/description. Likewise, if the bond price is higher than 100 you will get a lower yield than the issued rate.
Tom Tucker says
Today (11/23/22) is the announcement date for the 13 week and 26 week T-Bills. It’s currently 3:50 PM ET and Fidelity shows zero New Issue Treasuries available for ordering. In the past, I have typically seen these show up between noon and 1 PM ET. Has anyone else run into this situation with Fidelity? Does this imply that Fidelity may not participate in the offering of all New Issue T-Bills?
Tom Tucker says
No need to reply. These eventually showed up on Fidelity.
Austin says
Harry, thanks for your recent reply re: looking up the Investment Rate on an existing T-bill.
Next question: Trying to find out the actual time-of-day of upcoming auctions (esp. of the 17-week) is a challenge. Also, it appears that the auction window is very tight, just a couple of hours? In fact, when I recently signed onto Fidelity to buy a 17-week T, the auction was already closed that day. If you have any info or links related to actaul time of day of these upcoming auctions, esp. the 17-week, I would appreciate it.
Harry Sit says
The order window for the 17-week bill is shorter but the process is the same. For example, the schedule shows the next 17-week bill will be announced on November 29 and it will be auctioned on November 30. So you make cash ready to go in your account and set a calendar reminder to place your order by the night before the auction date. Use Google Calendar or equivalent, or set an alarm on your phone.
The actual time of day for the auction is for financial institutions. Brokers have their own cutoff time for retail orders. It may be 8:30 or 9:00 a.m. Eastern Time on the auction date, which can be a challenge for people on the west coast. Having your order in by the night before makes sure you won’t miss the broker’s cutoff.
David says
If you’re set on buying the 17-week bill then you can place an order 24 hours in advance from your broker account as long as the money is in your account and ready to go. You can also buy it the morning of when the market opens at 9:30 AM EST. The link for when the bills are available is in Harry’s article. https://home.treasury.gov/system/files/221/Tentative-Auction-Schedule.pdf
Austin says
Great !!! Thank you for your timely replies, Harry and David !!!
Glen says
There are 5 days between the auction and settlement dates for 4 week T Bills. If funding T Bills from a Fidelity MM fund would you know if I continue to receive interest in MM fund for those 5 days? Does the money remain in MM fund until settlement, or is it debited at time of auction, or?
Harry Sit says
A pending debit will reduce the amount available to trade and the amount available to withdraw but your money stays in the money market fund and earns interest until the settlement date.
Yuriy says
does interest on 5 or 10 year notes compound?
DB says
I don’t believe so. They are paid out to you and you will have to reinvest them in an ETF/fund yourself. Or buy a new bond when sufficient interest has accrued.
Eric Bowlin says
In my entire adult life I never thought I’d be interested in bonds. That’s because interest rates were continually going down and the returns didn’t justify holding them. That all seems to be changing now as bonds become an attractive alternative to low yield investments that still have moderate risk.
Steve Adler says
Hi Harry,
I learned about your great site from depositaccounts.com, and I was hoping you could answer questions regarding t bills at maturity. I’ve searched on the Internet and treasurydirect.gov without success.
If a 52-week bill with par value of $2,000 is purchased for $1,900 (with an APY a bit more than 5%), I’m wondering what happens at maturity 52 weeks later with various options. In each of the options, the rate at maturity will be assumed to be about 5% and the term of the new bill would again be 52 weeks.
Option 1: the bill is renewed. Would the purchaser get $100 of interest, and the $1,900 principal invested in another 52-week bill with par value of $2,000, or would the $2,000 be invested in a bill with a par value of about $2,100?
Option 2: the bill is renewed for a $1,000 par value bill. Would the purchaser receive $1,050 ($1,000 par value plus $50 interest)? If this is the case, how would the purchaser arrange this? Or would the purchaser receive the $2,000 and have to purchase a different bill for $950 with a par value of $1,000?
Option 3: the bill is renewed for a $3,000 par value. Would the purchaser have to receive $2,000 from the original bill and purchase a separate bill for $2,850 with a par value of $3,000? Is there any way to roll the $2,000 bill over and add an additional $850?
I appreciate any guidance you can provide.
Thank you,
Steve Adler
Harry Sit says
The “auto roll” option offered by Fidelity, Schwab, and TreasuryDirect doesn’t change the principal amount when it’s triggered.
1) You will get $100 interest and have $1,900 invested in a new bill with a face value of $2,000.
2) If you’d like to reinvest a smaller amount, you shouldn’t choose “auto roll.” You’ll receive $2,000 from your original investment and place a separate order manually for $1,000 face value.
3) If you’d like to reinvest a larger amount, you can “auto roll” your original investment and place a separate order manually for the additional face value. You’ll receive $100 interest and pay $950 for your new order of $1,000 face value. Or you don’t choose “auto roll” and place a separate order manually for $3,000 face value (same option 2 as above).
Frank says
Question regarding the lag time between auction date and settlement date on new issue t-bills. Fidelity removes funds from account on auction day, but settlement day is usually a few days later . Do your funds earn interest those few days once removed from core account and t-bill settlement day arrives? If no interest is earned, wouldn’t these non-interest earning days need to be taken into account when calculating the overall yield received from t-bill?
Harry Sit says
Fidelity doesn’t remove funds from the account on the auction date. They enter a negative amount as a pending transaction. The pending transaction reduces the amount available to trade and to withdraw. Your money stays in the money market fund and earns interest until the settlement date.
Jay says
Hi Harry,
I don’t see a way to buy this in IB. Just wanted to confirm…
Jay
Harry Sit says
Interactive Brokers doesn’t offer new-issue Treasuries. It charges a commission when you buy on the secondary market.
Steve Adler says
Good to know, thank you
Coriander says
Now that we’ve technically hit the debt ceiling and Treasury is taking “extraordinary measures” to avoid default, is Treasury Direct still selling debt? Can I buy I bonds or other treasuries through Treasury Direct regardless of the debt limit, as long as we haven’t reached the “x date” when a default may occur?
Harry Sit says
Business as usual until you see something specific.
Matt says
Harry, thanks to your great blog and your book, I’ve learned how to regularly by Treasury bills and notes through auctions. One thing that I’ve noticed, though, is the different yield depending on the bank you use. I’ve bought the same six-month Treasury bills, on the same dates, using funds through Fidelity and Schwab–several times. Buying bills from the same auction, but using funds from different banks. Each time, the expected yield quoted by Fidelity has been slightly lower. And then once the bill is purchased, and placed in my account–the yield is slightly lower. Not a huge difference– like “4.56” for Fidelity to Schwab’s “4.76.” But still noticeable. Is that my imagination, or do these large institutional banks offer different returns, as a practice, on the same Treasury auctions?
Harry Sit says
Your imagination. I put it in red font in this post: Ignore the estimate. The estimate before the auction is just that, an estimate. Everyone gets the same actual yield from the auction. It doesn’t matter which broker you use.
To verify that’s the case, look at the dollar amount deducted from your account per $1,000 of face value in your trade confirmation or account history. You get the same yield for the same Treasury when you pay the same price on the same day.
When you’re holding to maturity, it doesn’t matter what yield is displayed in your account post-auction. Treasury pays the same principal value at maturity regardless of which broker you use.
Steve Adler says
Where can we find the estimated yield for an upcoming auction?
Harry Sit says
You see an estimated yield in the listing before you place an order. The estimate for a new-issue Treasury doesn’t affect anything because it’s just a wild guess.
Jacie Breck says
Now that we’ve reached the debt ceiling is there greater risk investing in T bills? Would sticking to CDs be any safer now? Thanks
Harry Sit says
I’m not worried but obviously this is unprecedented. No one knows what direct and secondary effects it will have.
SSA says
Thank you for this informative post. What are your thoughts on moving money to a treasury fund like VUSXX?
I know that the yield will lag the actual treasury rate – but your funds would be much more liquid.
Is there a difference in the way Vanguard would report the interest earned for directly buying treasuries vs keeping funds in VUSXX? Either way Vanguard would need to indicate that state taxes are exempt, correct?
Harry Sit says
It’s a great option for money that you may need at any moment’s notice. See Guide to Money Market Fund & High Yield Savings Account. Interest earned from direct holdings of Treasury Bills and interest earned through a money market fund that invests in Treasury Bills are reported by the broker on different tax forms but you’ll have supplemental information to help you calculate interest exempt from state and local taxes.
Jim Davis says
T-Bills are 100% liquid. In fact , they are more liquid than the money fund, which can only be sold end of day.
The t-bill sale is intraday , and the funds are available to you
SSA says
@Jim Davis, when you say they are hundred percent liquid – do you man that they could be sold on the secondary market before maturity?
Lefty says
Isn’t it more advantageous to buy treasury bills in a taxable account or Roth IRA versus a traditional IRA since in a traditional IRA the distribution wouldn’t benefit from the exemption from state or local taxes?
Harry Sit says
It’s all relative. If you’re going to put Treasury Bills in a taxable account or Roth IRA versus a Traditional IRA, what will you put into a Traditional IRA? If you’ll put stocks in a Traditional IRA, you lose the favorable tax rates on long-term capital gains, which affects you more than losing the exemption from state and local taxes. Between these two assets, you’d rather put Treasury Bills in a Traditional IRA.
Leighton says
Losing interest on weekends and market holidays when buying T-bills. My learning experience to consider:
My brokerage money market (MM) fund pays 4.48%, but a cash position pays nothing. When I buy T-bills, the brokerage company will not take the money directly from my MM to buy the T-bill. I must sell the MM the BUSINESS day before settlement of the T-bill, so I lose at least a day of 4.48% there. The same happens in reverse on maturity – I lose another day of 4.48%.
In addition, 1, 2, & 4 mo bills settle on Tuesday, so I got caught once where the Monday before was a market holiday. So, I had to sell my MM on the prior Friday, losing 3 days of 4.48% (Sat, Sun, Mon), so that the cash will be there to settle on Tuesday.
On maturity, the money is put back into cash. If that happens to be on a Friday, then my trading that back to my MM wouldn’t happen until the following Monday, losing interest for Sat, Sun, & Mon. (God forbid if Monday is another market holiday.)
Naturally, the shorter term the treasury, the greater impact this has. Just a thought.
Harry Sit says
That sounds like a problem specific to your broker, not an attribute of T-Bills. A better broker like Vanguard or Fidelity automatically sells money market fund shares on the settlement date for the purchase and drops the money into the money market fund on maturity.
There must be other reasons that you use this broker. Losing interest before and after settlement and having to manually buy and sell money market fund are just prices you pay for the other benefits you get from this broker.
Leighton says
Right; thanks for that. I didn’t know if brokers other than Schwab did it differently. Apparently Fidelity and Vanguard do what Jack White Co. did 25 years ago already, “sweeping” the proceeds from sales directly into your chosen MM fund. And when buying, they take it out of the MM fund – all as you indicated for Fidelity and Vanguard.
Jack White Co was bought by TD Waterhouse long ago, who then bought Ameritrade. I switched to Schwab 10 years ago, and somewhere along the line that “sweep” feature was lost, as acknowledged by their rep by phone a couple of hours ago.
Matt F says
Harry: When I buy a T-Bill on the secondary market & hold to maturity, is my interest earned = what I get at maturity minus the secondary market price I paid? Or is part of that considered capital gain for tax purposes?
Harry Sit says
All interest. No capital gain.
Joe says
Good Day, My account will be moving to Schwab from TDAmeritrade later this year. I noticed on the Schwab site that the fee for buying Treasuries is listed as $0 + $25 service charge. Curious if anyone in your group using Schwab would know what the $25 service charge is? Is that per treasury bought, an annual fee, etc. Thanks…
Harry Sit says
Schwab’s fee schedule has two columns. The first column shows $0 for online trades. The second column shows $0 + $25 service charge for broker-assisted trades.
Allan says
Talked to Vanguard’s Fixed Income desk on Monday. Vanguard’s cut-off time to put in bids for T-Bills on the Auction Date is 9:30am. He said many people wait until just before the 9:30am cut-off time to get the most accurate “indicative yield” on the auction.
Alex says
Hi Harry,
First question
Regarding auto roll feature. I am getting 1) interest payments every six months + 2) full face value when the note matures
Does auto roll feature take care of 1) and 2)? Or do I need to use those interest from 1) and 2) and buy new bills manually?
Second question
Is there any way to buy a fractional bill for $1500 instead of $1000? How would I spend $500 if I want to buy a bill with this?
Harry Sit says
The auto roll only kicks in at maturity. Interest payments will get credited to the default cash position, which is a money market fund at Fidelity. You can only buy in $1,000 increments in a brokerage account. An amount less than $1,000 stays in the money market fund. You can add it to a mutual fund or use it to buy an ETF.
Alex says
As best I can tell, the major virtue of Treasury Direct is the reinvestment process: it’s usually seamless at Treasury Direct; there’s usually no gap between when the old security matures and the the one is issued. But the Treasury Direct web site takes getting used to, and Treasury Direct no longer provides help via e-mail; you have to call them early in the day.
I’m new at this, but at Schwab there can be significant issues with the “autorollover” process for reinvestments. Most importantly, it’s only available at Schwab for short term T-bills, 6-months or less is duration. Also, it’s not available at all for Schwab Alliance accounts; these are accounts opened through a financial advisor. I don’t know whether or not there would be gaps between the maturity date and the new issue, but if so beware: the money will be in Schwab bank during the gap, which last time I checked doesn’t pay much interest, and also I don’t believe Schwab bank records any beneficiaries you may have recorded for your Schwab brokerage account, which SUBSTANTIALLY reduces FDIC protection while the money is sitting in Schwab bank. Schwab: if you’re listening, and I’ve made any mistakes please correct!
Harry Sit says
There’s a one-week gap during auto roll at Schwab. Zero gap at Fidelity.
Donald says
Aside from auto-rolls, but still regarding the Schwab bank account as a “middleman,” between your high interest MM fund, and the T-bills:
Does Fidelity also have their bank as a “go-between,” out of which Treasury purchases are settled, and into which maturing Treasures are deposited?
If one keeps his money in a high yielding MM fund, then the Schwab bank account middleman always delays settling, since one must sell the MM fund the previous day.
And again on maturity, as one can only buy back the MM fund AFTER the Treasury money appears on one’s Schwab bank account.
And God forbid that a weekend or holiday falls between these actions, or one loses even more days of interest.
Harry Sit says
Fidelity uses a money market fund as the core position for settlement (or at least you can choose a money market fund as your core position if it’s not the current default). This money market fund doesn’t have the highest yield but you don’t lose much. We’re talking about a difference of maybe 0.25%.
Sammy says
Since the US never has defaulted before the theatrics in Washington makes me as the following questions:
– What do holders of Treasuries lose exactly?
– Do they lose interest only for a certain period of time or the whole value of treasury bill/note?
– Can government return the full value of bonds and full interest at a later date?
These question may sound foolish, but since we’ve never had the US default in the past, I’m not sure what questions/concerns I should consider before buying a T-Bill. OTOH, I also hold bond funds so I would be fleeced either way I bet :-(.
Thanks
Harry Sit says
No one knows what will happen this time. We know that during previous government shutdowns, non-essential federal government employees were furloughed without pay. They received back pay after the government opened again. The employees basically had paid time off. If I have a bill maturing during a standoff, I expect to be paid in full with interest when it’s all said and done.
Nan says
Thank you for the detailed guide, Harry. I’ve been trying to find out the price advantage of buying a new issue vs buying in the secondary market ever since I read your statement that buyers can’t get a bargain by buying in the secondary market.
1. Why would bid-ask spread matter if you’re just buying and not selling? Wouldn’t it be a point of concern only if the ask price is higher than the original price at auction, which isn’t always the case?
2. If the YTM of a T-bill in the secondary market is higher than the estimated yields of upcoming new issues, isn’t it better than to buy the one in the secondary market? Isn’t YTM at ask all I need to care about price-wise when making the purchase decision? And even then, are people just banking on the hope that the actual yield for the new issue ends up being higher than the secondary’s YTM?
3. I’ve also been told that the price/yield of a T-bill is the same whether I buy it at auction or in the secondary market. How is this possible when a bond price goes down in a rising interest environment, which will make the secondary offering cheaper?
Looking forward to learning from the knowledge you share and finally getting some clear answers! Thank you so much in advance.
Harry Sit says
First of all, if you prefer the immediacy and the certainty of knowing your yield, you can buy on the secondary market. See How to Buy Treasury Bills & Notes On the Secondary Market. You have a wider choice of maturities when you buy on the secondary market.
1) The bid-ask spread isn’t huge but it always exists. No one works for free. Bond dealers make money when they trade with you. It doesn’t matter whether you’re buying or selling. Think of the currency exchange shops at airports. They always quote two prices. They make money regardless of which way you’re exchanging. I showed an actual example of a secondary market quote in the post linked above. The spread may be small enough that you don’t care but it still exists.
2) An estimate is just that, an estimate. It means nothing when the yield in the secondary market is higher than any estiamte. The actual yield may end up higher or lower than the yield you saw at one point in the secondary market but it isn’t predicted by the estimate. People aren’t banking on the hope that the actual yield ends up higher. They are banking on not paying the bid-ask spread every time.
3) You’ve been told wrong. The yield isn’t the same. It can’t be because the yield in the secondary market changes by the minute. A rising interest environment doesn’t mean that the yield must rise every single day. Even if it does rise every single day, there’s always another auction on the horizon and the price will be cheaper again. By that logic you’d be waiting forever for it to go cheaper and cheaper.
In the end, if you only buy one time for a small amount, it doesn’t matter much how you buy. If you buy frequently in large amounts, the spread adds up. In addition, the auto-roll feature is only available when you buy new issues. Auto roll saves you time from tracking maturities and placing new orders.
Alex says
In today’s world, marketable Treasury securities are a very reasonable investment for the fixed income portion of a portfolio. They pay more interest than bank accounts, and are backed by the full faith and credit of the Federal government (no sarcasm, please!). The interest is not subject to state and local income taxes, though it is Federally taxed. Treasury securities are liquid, due to the robust secondary market (they are subject to interest rate risk, of course).
The downside is that Treasuries mature, at which point the money stops earning interest, until it is reinvested. As Mr. Sit has noted, reinvestments require either watching maturity dates and making reinvestments manually, or taking advantage of the secondary markets and “auto-rollover” services from some brokers, such as Fidelity. Usually such reinvestments involve a small transfer cost in the form of the buy-sell spread. This isn’t high, but it is certainly real. I’ve heard the figure 10-20 basis points (0.1 to 0.2 percent). If someone has better or more accurate estimates, please post!
The only practical way of avoiding this inconvenience and expense is by opening a Treasury Direct account. These can automate reinvestments, and avoid gaps during which the investment doesn’t earn interest. The Treasury tries to time new issues such that the settlement date for a new issue matches the date for a corresponding maturing security. But there are limits on how many reinvestments one can do. Right now, in my opinion, the major downside of Treasury Direct is that the accounts can be complicated for a newbie to master, and the Treasury is not providing good customer support – they no longer accept most email, for example. Also, Treasury Direct does not provide a means for selling securities prior to maturity on the secondary market; one has to transfer the securities “in kind” to a broker. (They used to provide a convenient mechanism for selling on the secondary market, but they closed down this feature years ago, which is unfortunate). You can easily open a Treasury Direct account, but the lack of good customer support is a hindrance. Your tax money at work!
Harry Sit says
Fidelity’s auto roll works similarly to TreasuryDirect’s reinvestments. It uses the money from a maturing issue to buy a new issue of the same term. The auto roll uses Treasury auctions, not the secondary market. The dates line up well and there’s no bid-ask spread. Charles Schwab does the same with new issues except they only do it for Treasury Bills with a maturity of six months or less and they delay the purchase by one week after an existing bill matures.
Sammy says
@Alex,
I’m not sure what exactly the point you are trying to make with your comment. This info has been known for a long while. I personally will say that Treasuries are risk-free fixed income investments after the comedy in Washington ends. Even Harry said above that we’re OK to buy 1 or 2-mo treasuries… Well, I had eyes on 6 month, 1 year and 2 year, but now I think I will wait before I buy them. And it’s so irritating (to me at least) that these threats of US gov’t default have become a more frequent topic during the last 10 years.
Alex says
Harry,
Thanks very much for your comment. I didn’t know that about Fidelity’s autoroll facility. In the past, I’ve used Treasury Direct to hold my Treasuries, but it sounds like Fidelity would be a better bet. They’re easier to reach than Treasury Direct if there are questions.
RobI says
First time buying a 2 year bond (vs a Tbills) and trying to understand how bonds work. I see this in my Vanguard account after yesterdays auction
U S TREASURY NOTE 4.625% 06/30/25 06/30/23 at $99.92
I have 2 questions.
1. Why is the purchase price $99.92 vs $100?
2. Will the interest be paid out 6 monthly into my Vanguard brokerage account?
Harry Sit says
The coupon rate (the 4.625% part) is only set in increments of 0.125%. When the auction results in a yield between two increments, in your case 4.67%, which is above 4.625% but below 4.75%, the additional yield above the coupon rate is given in the form of a small discount in the price. Paying 99.92 gives you a yield of 4.67%.
Interest is based on the face value and the coupon rate. You’ll receive $1,000 * 4.625% / 2 = $23.125 per $1,000 in face value every six months as a cash deposit in your brokerage account.
RayK says
Hi Harry,
I am in the learning curve buying treasuries, so can you please explain “set in increments of 0.125%” in last post?
I get confused understanding the difference between the coupon rate 4.625% and where the 0.125% fits in? How is it calculated?
Thank you!
Harry Sit says
It means the coupon rate must be an integer multiple of 0.125%. It can be 4.5%, 4.625%, 4.75%, or 4.875% but it can’t be 4.60%, 4.70%, or 4.80%. The coupon rate is set from the yield rounded down to the nearest integer multiple of 0.125%. When the yield is 4.67%, the coupon rate is set to 4.625% because that’s the first number you hit as you go down from the yield to the possible values. If the auction had resulted in a yield of 4.61%, the coupon would’ve been set to 4.5%.
RayK says
AS I try to understand this, am I correct to pay more attention to the YTM when buying a bond with the coupon being part of the total yield payout?
Thank you much Harry!
Harry Sit says
Between the coupon and the yield, yes, but I would say pay more attention to the maturity you want. The yield is determined by the market. It is what it is. No one knows how it will change. It isn’t possible to pick a “sweet spot.”
ustaad says
Very surprised by today’s 26-week auction result. The results for the CUSIP 912797GE1 is identical to the one-week ago auction for CUSIP 912796ZY8. In both cases, the rate settled at 97.335722. Is this a normal occurrence? It appears much like a rate manipulated by big players particularly in light of the fact that today’s auction is after the Fed raised the rate by 25 basis points!
Harry Sit says
It’s normal. You see the prices from past auctions here when you filter for the 26-week term.
https://treasurydirect.gov/auctions/auction-query/
The same 97.335722 price also happened on 7/10. If you’re not looking at too many digits after the decimal point, the price has been $97.3X since 5/22. Last week’s price already anticipated the Fed’s move.
Ustaad says
Thanks, Harry!
RobI says
Harry
Can you help explain how to correctly compare yields between Tbills and money market funds. In particular, for Vanguard Money mkt funds, is compound yield the correct comparison to Tbill yield rather than 7 day yield.
Secondly are the historical yield quoted on the Treasury site all compound yields? …. see here
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202308
Harry Sit says
There’s a technically correct answer but we don’t need to get into it. The Vanguard Federal Money Market Fund has a 7-day SEC yield of 5.26% and a compound yield of 5.39% as of 8/11/2023. The small difference between the two numbers is secondary to other considerations between T-Bills and a money market fund. The T-Bill yield is locked in for the full term. The yield on a money market fund changes daily. If the daily yield goes up during the term of a T-Bill, a money market fund that starts with a lower yield will catch up. If the daily yield goes down during the term of a T-Bill, a money market fund that starts with a higher yield will lose its lead. We don’t know whether the daily yield will go up or down and by how much. We can’t make decision based on whether the T-Bill yield is higher or lower than the average yield on the money market fund in the last seven days.
The different terms of T-Bills and a money market fund make them not directly comparable. Buy T-Bills if you want a rate fixed for the term and you can commit to holding for the full term. Buy a money market fund if you need to take the money out on unpredictable dates. I have both. Money I know I don’t need until a certain date is in T-Bills. Money I may need at any moment is in a money market fund. I don’t know which part had or will have better returns.
Leroy says
Thank you so much for this article, Harry. I’m just dipping my toe into buying t-bills for the first time (through Fidelity.) I just want to double check my understanding of the risk in Zero Coupon Bond (ZCB) — if interest rates rise higher than the ZCB, then it loses value ONLY in the secondary market??? As long as I hold the ZCB to maturity, then I won’t lose the interest rate I bought the bond for?
Thanks,
L
Harry Sit says
Treasury Bills by definition have no coupon but they’re not the same as Zero Coupon Bond. See comment #23. You get the guaranteed face value back if you hold the Treasury Bill to maturity. Price fluctuations after you buy don’t affect you when you don’t sell.
Leighton says
Harry, the “Daily Treasury Par Yield Curve Rates” you mentioned to get a feel for the T-bill auction are given in months, whereas Tbills are sold in weeks. This led me to click and compare the “Daily Treasury Bill Rates” selection, where I saw those values are indeed given in weeks.
I’ve noticed for the same dates, the Tbill rate range is always lower than the “Par Yield Curve Rate,” and is much closer to the subsequent auction rate.
For example on Oct 5, 2023:
Daily Treasury Par Yield Curve Rates was 5.57%
Daily Treasury Bill Rates: “Bank Discount” was 5.30, and “Coupon Equivilent” was 5.41%
The Oct 5 auction result was: 5.39%, which is very close to the “Coupon Equivilent” of 5.41%. So, would this be a better estimate for the auction than “Daily Treasury Par Yield Curve Rates”?
(Fidelity’s “expectation” on it’s purchasing page was 5.35% – also very close to the resulting auction result).
Harry Sit says
I use the Daily Treasury Par Yield Curve Rates because this post covers all maturities. Daily Treasury Bill Rates also works if you only care about bills. Both are good enough to get a feel. I would just call the rate mid-5%. The small differences in the data sources shouldn’t affect your decision in whether to buy or which maturity to buy.