In its second meeting of the year, the Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points, marking one year of consistent rate increases.
This most recent announcement sent investors into a frenzy, with many panic-selling their investments to avoid incurring fed-induced losses. For investors who can’t stomach the roller coaster that is investing in the stock market in a high-inflation environment, they’re turning to safe haven assets like treasury bills—and it may pay off in the short-term.
Investors may be able to generate ‘attractive returns’ as rates continue to rise
Treasury bills, sometimes referred to as T-bills, are short-term securities issued by the U.S. treasury that are backed by the U.S. government with terms ranging from four weeks to 52 weeks.
For the duration of your term, you’re agreeing to lend the U.S. government money in the form of this bill, which is usually sold in increments of $100. When your treasury bill reaches maturity at the end of your term, you’ll get your money back—plus interest. And, unlike other savings vehicles like certificates of deposit (CDs), you can sell a treasury bill before it matures. For savers who value liquidity, this could be a key selling point.
T-bills are sold at face value or at a “discount.” And once they mature, you get the face value in return. The difference between the face value and the discounted price you initially paid is “interest.” That discount represents the rate of return you can expect once your T-bill reaches maturity.
Say a $1,000 52-week (one-year) bill sells for a discount rate of 0.04%. To see what the purchase price will be for a particular discount rate, use the formula:
Price = Face value (1 – (discount rate x time)/360)
In this example it would be: Price = 1000 (1-(.04 x 365)/360
Giving us $959.44
In this example, the bill sells for $959.44, giving you a discount of $40.56. So when you get $1,000 after a year, you have earned $40.56 in “interest.”
“T-Bills are an attractive option for investors today because their yields are higher than longer Treasuries that have maturities ranging from 2 to 30 years. Depending on the length of the T-Bill investors can get yields approaching 5%,” says Kevin Nicholson, Global CIO of Fixed Income at RiverFront Investment Group. “For example, a 6-month T-Bill is currently yielding 4.75% while the 10-year Treasury is yielding 3.47%. Therefore, investors do not have to tie up their money for a long period of time to get an attractive return.”
How to invest in T-bills and what to consider before you do
You can invest in treasury bills directly from the U.S. government via the TreasuryDirect portal, although treasury bills can also be purchased and sold through your bank or brokerage.
Experts say there are a few considerations you should make before taking the leap.
Rising interest rates: The Fed’s recent interest rate increase likely won’t be the last, which could influence the T-bill term you select. “Investors should consider their interest rate expectations over the next year given that the Fed has raised interest rates to fight inflation,” says Nicholson. “Investors must weigh the possibility of facing reinvestment risk, that is the potential that yields could be lower when the T-Bill matures, especially if they choose to invest in shorter maturity T-Bills as a substitute for long maturing treasuries today.”
You’ll still owe (some) taxes: T-bills are exempt from state and local taxes, although they are still subject to taxes at the federal level.
T-bills won’t reward you with regular interest payments: If you’re looking for a pick-me-up in the form of a regular interest payment, T-bills aren’t for you. Because T-bills are short-term investments, you won’t receive frequent interest payments the way you would with a bond or high-yield savings account.
The takeaway
If you’re new to investing, or simply looking for a low-risk way to grow your money in a volatile market, you might consider buying treasury bills. Although, it’s important to make sure that you understand how they work, how much you stand to gain at maturity, and determine whether this type of investment fits into your investment strategy.
This story was originally featured on Fortune.com
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Source: https://finance.yahoo.com/news/treasury-bills-popularity-booming-fed-191025440.html