Fed rate hikes make Treasuries an attractive and safer investment

A short-term saver? Say thanks to the Federal Reserve.

One of the benefits of the Fed’s interest rate hikes, aimed at wresting control of inflation, is that savers looking for a safe investment in a year or less can now get the best yield in ages from Treasuries or treasury bills.

Savings rates have jumped from nearly zero to more than 4 percent over the past 12 months on these short-term securities issued by the federal government. On Jan. 24, one-year Treasury bills yielded 4.7 percent, up from a rate of 0.57 percent a year ago. The six-month Treasury bill was 4.82% on Jan. 23, compared with 0.36% last January, and the three-month Treasury bill yielded 4.58%, compared with 0.13%.

And while the Federal Reserve is keeping interest rates high — which seems likely after Wednesday’s quarter-point hike — investing short-term money in Treasuries has a certain drama-free appeal with modest returns.

While not a get-rich-quick scheme, “T-bills currently offer savers better returns than most online savings accounts and short-term [certificates of deposit]Ken Tumin, senior industry analyst at LendingTree and founder of DepositAccounts.com, told Yahoo Finance.

A bronze seal for the Treasury Department is displayed at the U.S. Treasury Building in Washington, U.S., January 20, 2023. REUTERS/Kevin Lamarck

What are Treasury bills

Treasury bills — such as 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. Treasury bills are the ticket for people looking for short-term savings of up to a year.

In addition, savers can save taxes on Treasury bills, which are exempt from state and local income tax.

“That could make a 4.6% yield equivalent to a 5% CD yield in an income tax state,” Tumin said.

How Treasury bills work

Treasury bills are sold at a discount to their face value; when the account matures, your interest is the difference between what you paid and the face value of the treasury bill. For example, if you purchased a $1,000 one-year T-bill at 4% interest, you would pay $960 up front and receive $1,000 at the end of the year.

You must buy on auction dates, which are held weekly for all maturities except one-year Treasury bills, which are set every four weeks. Most individual investors make a non-competitive bid, which means you get the average yield determined at an auction. (Emergency funds may be best kept in high-yield savings accounts.)

Want to sell before the maturity date? It can be “a bit of a hassle,” Tricia Rosen, financial planner and founder of Access Financial Planning, told Yahoo Finance.

When you buy through TreasuryDirect — the government’s website — you must hold new marketable Treasury 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 matures.

You won’t pay a penalty or fee if you want to exit early, as you would if you withdrew from a CD early. However, you may lose money if the sale price of the T-bills is lower than the original purchase price you are guaranteed at maturity.

“For individual investors, Treasury bills may be better suited as a way to diversify your portfolio than as a replacement for your emergency savings,” said Greg McBride, senior vice president and chief financial analyst at Bankrate.com. “If you’ve had an unplanned expense and need to sell before maturity, you won’t be able to sell it to TreasuryDirect, you’ll have to transfer it to a bank, broker or dealer first.”

Purse full of money, close up

Treasury bills offer a safe haven for short-term savings. (Getty Creative)

Where to buy Treasury bills

You can buy newly issued Treasuries for maturities ranging from four weeks to 52 weeks through your bank or brokerage, which may charge a commission. Or you can buy them online for a minimum of $100 through the government’s TreasuryDirect program, commission-free.

However, the big firms, like Charles Schwab, Fidelity and Vanguard, don’t charge a fee when you buy Treasury bills. However, the minimum order for a new Treasury issue is usually $1,000 par value when you buy it through a brokerage. And if you want to buy Treasury bills for Individual Retirement Accounts (IRAs), you have to go through a broker. For those nearing retirement, this can be a smart place to put money away without worrying about what will happen to the stock market.

“Treasury bills pay a slightly higher rate than other short-term investments, and Treasury Direct’s website is easier to navigate than it was a few months ago, before they redesigned it,” Rosen said. “So it’s a good idea for someone who’s in a high-tax state.”

Kerry is a senior reporter and columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.

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