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