The Finance Buff

Treasury Bills vs CD vs Money Market

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I received the annual bonus from my employer for my work last year. I need to save this money for some planned expenses in the second half of this year.

I can just put it in a money market fund or online savings account. The going rate is about 1.5% (Vanguard Prime Money Market Fund, Alliant Credit Union). The rate can be 1.7% at some places where I don’t have an account.

I can also put half in a 3-month CD and half in a 6-month CD. The going rate is about 1.5% for a 3-month CD and 1.75% for a 6-month CD. Again, to get the best rates, I’d have to open accounts at places where I don’t have an account now. For the amount involved it’s not worth it.

Instead I’m going to try something else: Treasury bills. Treasury bills from the U.S. government are most similar to a short-term bank CD in that you lock in a fixed interest rate for a fixed term.  I can buy Treasury bills in my existing account. Treasury bills are also state income tax free.

Yields of Treasury bills have gone up quite a bit in the last year. Banks didn’t raise the rates on their CDs or savings accounts nearly as much. The yield on 3-month Treasury bills is now above 1.6%. The yield on 6-month Treasury bills is now above 1.8%. You can see the latest yields on Daily Treasury Yield Curve Rates.

You can buy Treasury bills directly from the U.S. Treasury via TreasuryDirect, or you can buy them in a brokerage account. The top 3 brokerage firms Vanguard (on the brokerage platform), Fidelity, and Schwab all sell new-issue Treasury bills at no commission. I prefer to use Fidelity for this because they provide better customer service than TreasuryDirect.

The U.S. Treasury currently sells new 3-month and 6-month Treasury bills every week on Mondays. You never have to wait long for the next one. You will see new issues available in the brokerage account on Thursdays. You place your order between Thursday and Sunday. If you are interested in an even shorter term, they also sell a new 4-week bill every week on Tuesdays. Check on Thursday or Monday for availability. See Announcement & Results Press Releases from the U.S. Treasury.

Yields are determined by an auction. You get the same yield for your tiny $1,000 purchase as a bank buying $100 million. Treasury bills are sold at a discount. You pay slightly less than $1,000 for each $1,000 bill. When the bill matures you get the full $1,000. The difference is your interest. When you buy in a taxable brokerage account, the brokerage firm will send you the necessary tax form for your taxes.

I took these screenshots when I placed the order with Fidelity. If you can’t figure out how to do it at Vanguard or Schwab, please contact customer service. Be sure to select “new issue Treasury.” You get no bid/ask spread only when you buy a new issue.

Under News & Research on the top, click on Fixed Income, Bonds & CDs.

Click on the New Issues tab.

Click on the plus symbol next to Treasury to expand the upcoming issues. You will see the maturity date of each issue and the expected yield. The expected yield will be very close to the actual yield after the auction. Click on Trade to buy the issue you are interested in.

Treasury bills are sold in $1,000 increments in a brokerage account. Enter a quantity of 1 if you’d like to buy $1,000 worth of Treasury bills. It will cost slightly less than $1,000. Fidelity lets you set up Auto Roll to automatically buy another Treasury bill of the same term when your Treasury bills mature. Because I need to use the money after the bills mature, I didn’t choose Auto Roll.

The auction for the bills closed yesterday. The yields were 1.675% for 3-month and 1.873% for 6-month. Considering that they are state income tax free, they are a better deal than bank CDs of the same terms.

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Comments

  1. 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.

    Reply

  2. 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.

    Reply

  4. 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.

    Reply

  5. 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.

    Reply

    • 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.

  6. What if for whatever reason you need your money back earlier than maturity time? With CDs, you can pull out losing certain amount.

    Reply

    • 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.

  7. 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?

    Reply

  9. Hi Harry
    this is great. Thank you!
    Can you post one article on which platform to use for IPOs?

    Regards
    Vikash

    Reply

  10. 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?

    Reply

    • 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.

    • 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”

    • 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.

  11. 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.

    Reply

    • 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).

    • It’s 8:45 am Pacific Time on Monday. I see the 4-week bill available at both Fidelity and Vanguard.

    • Sorry I meant to be looking to buy 3 month or 6 month bills. Don’t see them just the 4 week bills.

    • 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.

  15. 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.

    Reply

  16. 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.

    Reply

  17. 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

    Reply

    • 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.

  18. 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

    Reply

    • 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.

  19. 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?

    Reply

    • 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.

  20. 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?

    Reply

    • 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.

  21. 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.

    Reply

    • 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.

  22. 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

    Reply

    • 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.

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