A short-term saver? Say thanks to the Federal Reserve.
One benefit of the Fed’s interest-rate hikes aimed at wresting control over inflation is that savers looking for a safe investment for a year or less can now get the best yields in ages from Treasury bills, or T-bills.
Savings rates have jumped from just about zero to more than 4% in the past 12 months on these short-term securities issued by the federal government. On Jan. 24, a one-year T-bill was yielding 4.7%, up from a rate of 0.57% a year ago. A six-month T-bill was at 4.82% on Jan. 23, compared with 0.36% last January, and the three-month T-bill was yielding 4.58%, up from 0.13%.
And as long as the Fed keeps interest rates high — which seems likely after Wednesday's quarter-point hike — investing short-term money in T-bills has a certain drama-free appeal with modest returns.
While this is not a get rich quick scheme, “T-bills currently offer savers better yield than most online savings accounts and short-term [certificates of deposit],” Ken Tumin, a senior industry analyst at LendingTree and founder of DepositAccounts.com, told Yahoo Finance.
What are T-bills
Treasury bills — like i Bonds and Treasury inflation-protected securities, or TIPS — are issued by and backed by the U.S. government. I bonds, for example, pay interest for up to 30 years. T-bills are the ticket for people looking for short-term savings of up to a year.
Additionally, savers can reap tax savings on T-bills, which are exempt from state and local income tax.
“That can make a 4.6% yield equivalent to a 5% yield for a CD in a state with an income tax,” Tumin said.
How T-bills work
T-bills are sold at a discount to their face value; when the bill matures, your interest is the difference between what you paid and the T-bill’s face value. For example, if you bought a $1,000, one-year T-bill at a rate of 4%, you would shell out $960 upfront and receive $1,000 at the end of the year.
You must buy on auction dates, which occur weekly for all maturities, except the one-year T-bill, which is set for every four weeks. Most individual investors make a noncompetitive bid, which means you land the average yield set at auction. (Emergency funds might be best held in high-yield savings accounts.)
Want to sell before the maturity date? That can be “a bit of a hassle,” Tricia Rosen, a financial planner and founder of Access Financial Planning, told Yahoo Finance.
When you buy through TreasuryDirect — the government’s website — you must hold new Treasury marketable securities for at least 45 calendar days before transferring or selling them (even if it’s a four-week security). Interest is paid when the security reaches maturity.