Stay Away from Zero-Percent C of I in TreasuryDirect

There’s a saying — “A little knowledge is a dangerous thing.” When you don’t know much about a subject, you stay with the tried-and-true because there’s safety in the mainstream. As you learn more about the subject, you start to explore off the beaten path. That’s when the danger starts. You think you know what to do but you don’t know what to avoid. If you only know enough to get into trouble, you’re better off not knowing it.

We have an example of this in using TreasuryDirect.

Many people bought I Bonds last year at TreasuryDirect. You link a bank account and put in an order to buy. TreasuryDirect debits the bank account and gives you I Bonds in the account. Many readers of this blog have done that. It works in reverse when you sell. TreasuryDirect credits the linked bank account. These are all routine transactions.

Some people discover that you can also buy regular Treasuries in the TreasuryDirect account. You can buy in $100 increments as opposed to in $1,000 increments in a brokerage account. You can place the order more days in advance versus having to wait for the official announcement. TreasuryDirect supports “auto roll” whereas not all brokers support it. TreasuryDirect debits the same linked bank account for purchases and credits it when the Treasuries mature. These are all routine too.

Then some people notice this peculiar thing called a “Zero-Percent Certificate of Indebtedness” or in short “Zero-Percent C of I” or simply “C of I.” It’s basically TreasuryDirect’s version of uninvested cash in a brokerage account. It doesn’t pay any interest, hence “Zero-Percent.” Zero-Percent C of I can be designated as the destination of the credits from matured Treasuries, to be used as the source of your debits for the next purchase.

You would think this Zero-Percent C of I is useless because drawing from and sending to the bank account works just fine and you can at least earn some interest while the money is in your bank account, but some people decide to use Zero-Percent C of I to hold cash in TreasuryDirect.

That’s when the trouble starts. I read this report on the Bogleheads investment forum (I edited it slightly for brevity):

Well, I moved all of my savings into the US Treasury, in the form of four-week T-Bills that redeeem to C of I.

Normally, that’s not an issue, works every time.

Until two days ago when I got an email saying my account was flagged as having some concerns and Risk Management had placed a hard lock on the account as a precautionary measure.

I was asked to fill out a FS Form 5444. I mailed the notarized form but the processing time for this form is “20 weeks minimum.”

I called the Treasury and got transferred to the hardlock department. They said they received my form but couldn’t act on it.

They also said, the reason for the hard lock was because I bought a $1,000 C of I with my bank account, intending to use it to buy a T-Bill, and this was a fraud risk.

So I will not be able to log into my account to recover any of my money, nor will I be able to reinvest it.

Over the next 20 weeks I’m going to lose out on perhaps about $5,000 worth of interest, yikes.

False positives in risk management and account restrictions happen sometimes. Normally it wouldn’t be a big problem because at worst you can’t place new orders and money from matured T-Bills will still come back to your bank account. In this case, the money goes to Zero-Percent C of I, which earns no interest while it takes 20 weeks to resolve the account restriction.

This investor is clearly better off not knowing that Zero-Percent C of I exists.

He or she is also better off not knowing that you can use TreasuryDirect to buy T-Bills. If he or she bought T-Bills in a commercial brokerage account, at least the settlement fund or core position earns interest and it should be much quicker to resolve the risk management issue than 20 weeks.

To be clear, I don’t blame this investor for using Zero-Percent C of I or using TreasuryDirect to buy T-Bills. It still wouldn’t be a big problem if TreasuryDirect could review the notarized form and remove the restriction in two days as opposed to 20 weeks, but the reality is that TreasuryDirect is understaffed. The computer system runs routine transactions efficiently but things requiring human intervention can take a long time.

Lessons learned: Treat TreasuryDirect as a delicate object. Do as little as possible with it. Stay on the beaten path. Buy your I Bonds. Sell your I Bonds. Use your linked bank account to transact. Don’t use the browser’s back button. Remember your password and your answers to the security questions. Be extra careful not to get your account locked. Use your brokerage account when you buy regular Treasuries. Stay away from Zero-Percent C of I in TreasuryDirect.