What should investors know about U.S. Treasury Bills?
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
“What should investors know about investing in U.S. Treasury Bills?”
Investing in Treasury Bills (also known as T-Bills) involves several key considerations:
Safety: T-Bills are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. The risk of default is extremely low because the U.S. government has the ability to both print money and raise taxes to pay back Treasury investors.
Term: T-Bills are very short-term securities with maturities of one year or less, usually issued with maturities of 4, 8, 13, 17, 26, or 52 weeks. This makes them suitable for investors looking for a short-term, low-risk investment (as an alternative to cash).
Discount Pricing: T-Bills are sold at a discount to face value. For instance, you might pay $980 for a $1,000 T-Bill. When the T-Bill matures, you would receive the full face value of $1,000 in this example. The $20 difference represents the interest earned on your investment. You can evaluate what the annualized rate of return will be based on the interest to be earned from the discounted purchase price—in this case $20—and the amount of time before the specific T-Bill matures at $1,000.
Liquidity: T-Bills are highly liquid. They can be bought or sold before their maturity in the secondary market and may serve as an alternative to cash (such as a money market fund or bank savings account).
Income Tax Considerations: Interest income from T-Bills are subject to federal income tax, but are exempt from state and local taxes. Consequently, T-Bills are particularly attractive for investors in California and New York due to their high state and local tax rates.
No Regular Interest Payments: Unlike bonds or notes, T-Bills don't make regular interest payments. The only return you receive is the difference between the purchase price and the face value at maturity.
Minimum Investment Amount: T-Bills can be purchased for a minimum amount of $100 and in increments of $100 thereafter. Many investors purchase T-Bills in $1,000 blocks (but actually pay less than $1,000 because you’re buying at a discount).
Buying T-Bills: You can buy T-Bills directly from the U.S. Treasury through the TreasuryDirect.gov website, or on the secondary market through a brokerage platform (such as Fidelity).
Given these characteristics, T-Bills can be a good choice for conservative investors seeking a safe place to park cash for the short term. Because of their safety, historically they have generally offered lower returns compared to other types of investments. However, at the moment, due to the inverted yield curve, short term T-Bills are actually paying more interest than longer term T-Notes and T-Bonds.
A Treasury yield = how much investors can earn when they purchase a T-Bill. It is the percentage earned on the T-Bill investment or the interest rate at which the government is borrowing money.
As of 8/4/23, the yield curve is inverted because a 3-month Treasury Bill is paying (or yielding) 5.4%, which is more than a 2-year Treasury Note that is paying 4.8%, and more than a 10-year Treasury Note that is paying 4.1%.
5.4% - 3-month T-Bill Yield
4.8% - 2-year T-Note Yield
4.1% - 10-year T-Note Yield
Here's a simplified explanation of the differences between Treasury bills, notes and bonds:
Treasury Bills: These are short term bonds that last less than a year. Treasury bills are sold at a discount to their face value, meaning they provide investors with returns by paying them back at the full (not discounted) rate.
Treasury Notes: These are medium-length bonds that last between 2 and 10 years. They are sold as 2, 3, 5, 7 and 10 year notes. The 10-year Treasury note is the most well known. They pay interest every six months and return their face value at maturity.
Treasury Bonds: These are long term bonds that last more than 10 years, usually 20 or 30 years. They pay interest every six months and return their face value at maturity.
“Why does Warren Buffett's Berkshire Hathaway regularly invest in Treasury Bills?
Warren Buffett's Berkshire Hathaway and many other investors like Treasury Bills (T-Bills) for several reasons:
Safety: As mentioned earlier, T-Bills are backed by the full faith and credit of the U.S. government. This means that the risk of default is extremely low, making them one of the safest investments available.
Liquidity: T-Bills are highly liquid and can be bought or sold with ease on the open market. This liquidity makes them a good place to hold cash that can be used for other investments as opportunities arise (especially for Berkshire Hathaway).
Income: Historically, while the yield on T-Bills can be relatively low compared to riskier assets, it's often better than what might be earned from holding cash in a regular checking or savings account (and T-Bill rates are currently high at the moment - see above).
“What does it mean when a wealthy investor "rolls T-Bills"?”
As for the term "rolling T-Bills," this refers to the strategy of reinvesting in new T-Bills as the old ones mature. So if an investor owns a 13-week T-Bill, when it matures, they would then use the cash proceeds to buy another 13-week T-Bill.
This strategy is often used by wealthy investors and companies like Berkshire Hathaway as a way to keep cash readily available while still earning a return. This way, they can have cash on hand to take advantage of investment opportunities as they arise without losing out on earning interest in the meantime.
Warren Buffett, known for his value investing strategy, prefers to have cash ready to deploy when he identifies undervalued investment opportunities for buying businesses and/or individual stocks. During times when such opportunities are scarce, rolling T-Bills can be a prudent way to manage cash reserves and potentially bolster your cash returns.
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Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.