The Federal Reserve raised interest rates three times in 2017, and is on track to raise rates a total of four times in 2018. The effective rate is up to a range between 1.75 and 2 percent, and will probably hit a bench mark range of 2.25 to 2.5 percent by the end of the year.
What does that mean for you? If your money is in your local bank, it probably means diddly-squat. You’re better off if your money is in an online savings account — mine boosted rates by a quarter of a percentage point — but you’re still not getting a market rate. And it makes sense. Your bank already has your money, so why would they pay more?
What you need when rates are rising is something that responds quickly to changes in the market. Luckily, there’s an instrument out there that does just that: Treasury bills. (See also: Interest Rates Are Rising: Here’s Where to Keep Your Cash)
What are T-bills?
A Treasury bill is a short-dated obligation backed by the Federal government. They are generally considered the safest way to hold dollars. (The government, after all, has the printing presses that let them print the money they need to pay you — and they can do so legally.) Selling Treasury bills is the main way the Federal government borrows money to fund projects such as highway repairs and building schools.
How T-bills work
Treasury bills come in several standard terms: four weeks, 13 weeks, 26 weeks, and 52 weeks.
Instead of paying face value and then getting an interest payment at maturity, you buy them at a discount, and the interest is paid at maturity. For example, if you bought a $100 T-bill for $97.70, you’d get back $100 upon maturity.
The rates are set by auction, and all the biggest players in the financial markets — banks, brokerage firms, large corporations (and small ones), hedge funds, and foreign central banks — buy T-bills on a regular basis. These major financial institutions participate in the auction, but they only want to win if the result is a good rate. (Otherwise they have lots of other ways to hold dollars.) You can participate in the auction as well, but as an individual investor, you don’t have to worry about bidding. You can enter a “noncompetitive” bid, which guarantees you the T-bills you want at the top rate the Treasury pays that week on that bill.
How you can buy them
You can buy T-bills directly from the U.S. Treasury through a TreasuryDirect account. Setting up a TreasuryDirect account works just like setting up an internet savings account. You need to link a checking or savings account in order to receive the payment when your T-bill matures.
By modern standards, the TreasuryDirect website is kind of clunky (it’s pretty much the same as it was 10 years ago), but it works just fine.
You can order a bill to be purchased at the next auction. The cost will be deducted from your linked account about two days later, and the face value will be paid into your account the day the bill matures. You can also set up a bill to be automatically reinvested, in which case your account gets credited with the discount on the next bill.
The Treasury maintains a page where you can see the rates at previous auctions. You can also see daily interest rates of Treasury securities.
If you know you’re not going to need the money for three, six, or 12 months, you can buy a longer-term bill — which will typically pay a higher rate of interest.
There are even longer-term securities, with terms varying from two years out to 30 years. There are also inflation-protected securities that guarantee the face value of your security keeps up with inflation. Depending on your investment needs, one of those might be the right investment for you. (See also: How to Use T-bills to Safely Boost Your Emergency Fund)
Things to consider before buying a T-bill
Anytime you have money sitting in your account that you’re not going to need for at least four weeks, you can use it to buy a T-bill. As the four-week mark approaches, check if you need the cash. If so, you don’t need to do a thing, as the money will show up in your linked account on the maturity date.
However, T-bills are not quite as flexible as an internet savings account, for a few reasons:
T-bills are auctioned on specific dates, so if you just missed an auction, you might have to wait to buy your T-bill.
T-bills are sold in increments of $100, so you can’t just invest any odd amount.
Getting your money back early is hard. There used to be a way to sell from within TreasuryDirect (for a $45 fee), but that no longer exists. Instead, you have to transfer the security to a brokerage account and then have the broker sell it for you.
A TreasuryDirect account isn’t the only way to buy Treasury securities; any broker (or friendly banker) can buy them for you. In addition to selling your T-bill early, a broker could also accept your T-bill as security for a loan — which might be a cheaper way of accessing your money early.