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Buy T-Bills to Earn More Interest on Your Savings

How to set up a TreasuryDirect account to invest in government securities commission-free

close up display of a few types of  investment secruities issued by the U.S. Department of the Treasury
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If you’re taking out a loan, you probably shout out the name of the Federal Reserve’s chairman, Jerome Powell, whenever you step on a rake. If you’re one of the nation’s long-suffering savers, however, you may be thinking about sending chocolates to all 12 members of the powerful Federal Open Market Committee, which has hiked the target range on short-term interest rates six times this year to between 3.75 percent and 4 percent. As a result, savings rates have gone from nearly zero to more than 4 percent in the past 12 months.

A great way to take advantage of rising rates is to buy short-term securities issued by the federal government called Treasury bills, or T-bills for short. A one-year T-bill yielded 4.59 percent on Nov. 10, higher than a 30-year Treasury bond, which checked in at 4.03 percent. You can buy newly issued Treasuries of various durations through your bank or brokerage, which may charge a commission, or you can buy them commission-free online for as little as $100 through the government’s TreasuryDirect program.

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Opening a TreasuryDirect account isn’t a simple process, and you may be inclined to pay a broker to buy Treasuries for you just for convenience. But in personal finance, free is nearly always better than not free — and, once you get your account set up, buying Treasuries on a regular basis might be a smart choice for money you may need quickly, such as an emergency fund.​

Treasury basics

Treasuries are IOUs issued by the government and are backed by the government’s full taxing power. They come in three flavors: bills, notes and bonds. A Treasury bill matures in one year or less, while a Treasury note matures in two to 10 years. A Treasury bond matures in 20 years or more.

We’re going to concentrate on T-bills, because those are what most people use for short-term savings. You can get T-bills with terms ranging from four to 52 weeks.

The government sells all its securities by auction, taking the lowest bids first. Most of the bidders are large financial institutions.

Most individual investors choose to make a noncompetitive bid, where you simply get the average yield set at auction. If you make a noncompetitive bid — and you must, if you use TreasuryDirect — you’re guaranteed to get the amount of T-bills you ask for.

Unlike most bonds, which make regular interest payments, 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, the Treasury sold a 52-week T-bill on Nov. 3. The price for a $1,000 T-bill was $954.40. When the T-bill matures in a year, investors will get $1,000. The $45.60 is your interest, which works out to a yield of 4.78 percent.

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Opening a TreasuryDirect account

The TreasuryDirect website isn’t fancy. To start an account, go to TreasuryDirect.gov and click on Open a New Account on the right-hand side, in the login box.​

Step 1. Choose the type of account you’re opening. The link isn’t in the three boxes that explain how to open an account. Instead, it’s a tiny blue box at the bottom of the page that says Apply Now. The default on the next page is Individual. The others are for businesses or estates and trusts. Once you’ve made your choice, click Submit in a tiny blue box on the lower left-hand corner. (Note: Don’t use your browser button to go back a page; use the tiny Return button.)

Step 2. Fill out your personal information: name, address, Social Security number, phone and email. You’ll also need to give your bank information: name, routing number, account number, name(s) on the account, and whether it’s a checking or savings account. Review the information carefully.

Step 3. Create a password and choose three reminder questions to answer in case you forget your password.

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That’s it. You’ll get an e-mail from the U.S. Treasury that gives you a onetime passcode; enter it when prompted, and you’re in. Hit the BuyDirect button to make purchases; check your purchases under Current Holdings. You can only buy on auction dates, which occur regularly. Noncompetitive bids must be received before 11 a.m. on auction day.

A strategy for rising rates: Laddering

One problem with buying an interest-bearing security is that you’re locking in current rates for a period of time — say, a year. Your biggest worry: Rates will keep rising after you’ve locked in. Powell has indicated that he will continue to raise interest rates to squash inflation. Bank of America Global Research expects the Fed to hike its key fed funds rate by half a percentage point in December and then again in February 2023, with another quarter-point hike in March.

How do you avoid yield regret? With a ladder. For example, suppose you have $1,000 you want to invest. Take $250 and invest it in a one-year T-bill at the next auction date. Do this every three months afterward. After a year, you’ll have one T-bill maturing every three months. Did rates keep rising after your first purchase? You would have caught the rise with the next purchase.

Another strategy: Invest the entire $1,000 in three-month T-bills. Every three months, reinvest $250 of the three-month bills into a one-year bill. At the end of the year, you’ll have four one-year T-bills, with one maturing every three months.

Currently, the one-year T-bill is the highest-yielding investment among bills, notes and bonds. This is not normal: Typically, the longer you tie up your money, the higher the yield. At least at the moment, it doesn’t make sense to tie up your money for, say, two years at a lower yield than what you could get for one year.

You can use the laddering strategy for bank CDs also, but banks currently aren’t offering one-year CDs with rates as high as a one-year T-bill. Banks typically don’t raise their savings rates as fast as they raise their borrowing rates. CD rates may catch up with T-bills eventually..