US Treasury bills, also known as T – bills, are short – term debt securities issued by the US government. They are considered one of the safest investment options globally because they are backed by the full faith and credit of the United States government. Buying US Treasury bills can be an excellent way for investors to preserve capital, earn a relatively stable return, and diversify their investment portfolios. In this article, we will walk you through the process of buying US Treasury bills step by step.
US Treasury bills are debt obligations of the US government with maturities of one year or less. They are sold at a discount from their face value. For example, you might buy a \(1,000 face – value T – bill for \)980. When the T – bill matures, you will receive the full face value of $1,000. The difference between the purchase price and the face value is your interest or return on investment.
Types of US Treasury Bills
There are mainly three common maturities: 4 – week, 13 – week, and 26 – week T – bills. Each maturity has its own characteristics and may be more suitable for different investment strategies and time horizons.
4 – week T – bills: These are the shortest – term T – bills. They are highly liquid, which means you can convert them into cash quickly. They are ideal for investors who have a very short – term investment horizon, such as those with surplus cash that they may need to use in a month or so.
13 – week T – bills: With a maturity of about three months, they offer a slightly higher yield compared to 4 – week T – bills in most cases. They are suitable for investors with a short – term investment plan, like those saving for a small – scale purchase in the near future.
26 – week T – bills: These have a six – month maturity. They provide a balance between liquidity and a relatively better yield compared to the shorter – term T – bills. They can be a good choice for investors who can lock up their money for a bit longer.
Advantages of Buying US Treasury Bills
Safety: As mentioned before, they are backed by the US government, so the risk of default is extremely low. This makes them a haven for investors during times of economic uncertainty or market volatility.
Liquidity: They are highly liquid in the secondary market. If you need to sell your T – bills before maturity, it is relatively easy to find a buyer, although the price you receive may be different from the face value depending on market conditions.
Tax – advantages: Interest income from US Treasury bills is exempt from state and local income taxes, which can be a significant benefit for investors.
How to Buy US Treasury Bills
Buying Directly from the US Treasury：The first step is to go to the official TreasuryDirect website (www.treasurydirect.gov). Click on the “Open an Account” button.
You will need to provide personal information such as your name, address, Social Security number, and bank account details. This information is used to verify your identity and set up the necessary links for funds transfer. After submitting the application, the TreasuryDirect system will perform an identity verification process. This may take a few days. Once your identity is verified, your account will be activated.
Place a Bid：Log in to your TreasuryDirect account. Navigate to the “Auction Schedule and Results” section to find the upcoming T – bill auctions.
Competitive Bid: With a competitive bid, you specify the yield you are willing to accept. However, there is no guarantee that your bid will be accepted. If your requested yield is too high compared to the market – determined yield in the auction, your bid may be rejected.
Non – competitive Bid: In a non – competitive bid, you agree to accept the yield determined at the auction. Non – competitive bids are usually accepted as long as they meet the minimum and maximum purchase limits. The minimum amount for a non – competitive bid is typically \(100, and the maximum is \)5 million for most T – bill auctions.
Enter the amount of T – bills you want to purchase (in multiples of $100) and select the type of bid. Then, submit your bid before the auction deadline.
Settlement
If your bid is accepted, the funds will be automatically withdrawn from your linked bank account on the issue date of the T – bills. For example, if you successfully bid on a 13 – week T – bill, on the issue date, the amount you paid for the T – bills will be deducted from your bank account. Your T – bills will be held in your TreasuryDirect account in electronic form. You can view the details of your holdings, including the maturity date, face value, and purchase price, at any time in your account.
Choose a Brokerage Firm
There are many brokerage firms that offer the service of buying US Treasury bills. Some well – known ones include TD Ameritrade, E*TRADE, Charles Schwab, and Fidelity. Consider the following factors when choosing a brokerage:
Fees: Different brokerages charge different fees for trading Treasury bills. Some may charge a flat – fee per trade, while others may have a more complex fee structure based on the amount of the trade or the type of account you have. For example, some online discount brokers may charge as little as \(0 – \)10 per trade for Treasury bill purchases.
Research and Tools: If you are new to investing in Treasury bills or want to make more informed decisions, look for a brokerage that provides research reports, market analysis, and trading tools. For instance, Charles Schwab offers a wide range of research materials on fixed – income securities, including T – bills.
Account Minimums: Some brokerages may have minimum account balance requirements. For example, Fidelity may require a minimum initial deposit of $0 for certain accounts, while others may require a few thousand dollars.
Open a Brokerage Account
Once you have selected a brokerage firm, go to their website and click on the “Open an Account” option.
Similar to opening a TreasuryDirect account, you will need to provide personal information such as your name, address, Social Security number, and financial information. The brokerage will also perform an identity verification process.
After your account is opened, you will need to fund it. You can transfer funds from your bank account to your brokerage account. The transfer methods may include ACH transfer (Automated Clearing House), wire transfer, or check deposit.
Place an Order
Log in to your brokerage account. Navigate to the fixed – income or Treasury section.
Search for the US Treasury bills you want to buy. You can search by maturity, face value, or yield.
Place an order. You can choose between a market order (which executes the trade at the current market price) and a limit order (where you set the maximum price you are willing to pay). For example, if you think the current price of a 26 – week T – bill is too high, you can place a limit order specifying a lower price at which you are willing to buy.
After placing the order, the brokerage will execute the trade on your behalf. The T – bills will be held in your brokerage account, and you can monitor their performance and value through the brokerage’s online platform.
Risks and Considerations
Interest Rate Risk: Interest rates and the price of Treasury bills have an inverse relationship. When interest rates rise, the price of existing T – bills in the secondary market falls. For example, if you bought a T – bill with a fixed yield and new T – bills are being issued at a higher yield due to rising interest rates, the value of your T – bill in the secondary market will decline. If you need to sell your T – bill before maturity, you may have to sell it at a loss.
Inflation Risk: Although T – bills are relatively safe, inflation can erode the real return on your investment. If the rate of inflation is higher than the yield on your T – bill, the purchasing power of your investment will decrease over time. For example, if your T – bill yields 2% per year, but the inflation rate is 3%, the goods and services you can buy with the proceeds from your T – bill will be less in real terms.
Reinvestment Risk: When your T – bill matures, you will need to reinvest the proceeds. If interest rates have fallen since you first bought the T – bill, you may have to reinvest at a lower yield, reducing your overall return.
Consider Your Investment Goals
Before buying US Treasury bills, clearly define your investment goals. If you are saving for a short – term goal, like a vacation in six months, a 26 – week T – bill may be a suitable option. If you are looking for a safe place to park your emergency fund, shorter – term T – bills such as 4 – week or 13 – week ones may be more appropriate.
Stay Informed about Interest Rate Movements: Keep an eye on economic news and interest rate trends. Central bank policies, economic data releases (such as GDP growth, employment figures), and inflation reports can all impact interest rates. By staying informed, you can make more strategic decisions about when to buy T – bills. For example, if you expect interest rates to fall in the near future, it may be a good time to lock in a higher – yielding T – bill.
Diversify Your Holdings: Don’t put all your money into one type of T – bill. Consider diversifying by buying T – bills with different maturities. This can help balance the risks associated with interest rate fluctuations. For instance, having a mix of 4 – week, 13 – week, and 26 – week T – bills in your portfolio can provide both short – term liquidity and potentially better long – term returns.
Conclusion
Buying US Treasury bills can be a straightforward process once you understand the steps involved. Whether you choose to buy directly from the US Treasury through TreasuryDirect or via a brokerage firm, each method has its own advantages. By carefully considering your investment goals, being aware of the associated risks, and following the tips provided, you can make informed decisions and potentially benefit from the stability and security that US Treasury bills offer. Remember, like any investment, it’s important to do your research and consult a financial advisor if you have any doubts or complex financial situations.
Related Topics:
How Do You Buy Us Treasury Notes
How Do You Get Government Bonds
