I’m confused about T-bills

[skumar]

Hi,

I am confused about how t bills work here’s a few questions I have about it:

1. What’s the average price difference you pay between the face value and discount value assuming I’m using fidelity to make these purchases?
2. How much can I make on average with t bills if I buy $29,000 worth every 3 months and just rinsing and repeating?
3. When using fidelity for purchasing T bills what does the expected yield mean? Is that my annualized rate assuming I reinvest for 1 year?

Thanks in advance for all of your help

 

[leejr]

@skumar

What’s the average price difference you pay between the face value and discount value assuming I’m using fidelity to make these purchases?

You pay the ask price. Not sure what you mean by discount value. If that's the discount basis, then that's an annualized figure.

How much can I make on average with t bills if I buy $29,000 worth every 3 months and just rinsing and repeating?

The yield. Per year. Currently 3mo tbills yield 5.44%, but rates are expected to fall, maybe around the summer, so you may get less than that over a full year.

When using fidelity for purchasing T bills what does the expected yield mean? Is that my annualized rate assuming I reinvest for 1 year?

Yes

 

[pete2]

@skumar Treasury Bills are sold at a discount rate. The discount is determined at auction and is announced as the “high rate”

Latest high rate for 13-week tbill (91-day) was 5.225%

29,000-(29,000(0.05225/360)91) = 28,616.98

You will be charged $28,616.98 and then 13-weeks later you will receive $29k, a total of $383.02 in interest.

With those numbers you can do the annualized rate math (helpful for having an even comparison for different investment options).

(383.02/28,616.98)/91*366 = .05383 = 5.383%

At that point you could buy more tbills at the next auction but the rate will almost certainly be different, and it seems most like experts expect it will be lower three months from now. One thing we know will be different is that we’ll be past leap day so the annualized calculation will revert to a 365-day year.

 

[joyfulservant77]

@skumar So this is what I get from the latest auctions on 13 and 17 week T-bills (3 and 4 month respective).

13 week is 98.67/100. You'd be buying 293 of them -- cost 28,910.31. at maturity in 13 weeks, you'd get 29,300 in your bank account. Gross interest 389.69

17 week is 98.28/100. You'd be buying 295 of them -- cost 28,992.60 at maturity in 17 weeks you would get 29,500 into your bank account. gross interest 507.40.

Not sure if your brokerage charges a fee, or a different rate, but if you went through treasury direct that's what you could expect. 13 and 17 weeks later, you might have a lower interest rate if you roll them.

For a year I've been doing laddered 4 and 8 week t-bills (have 4 of the 4 week and 8 of the 8 week so one of each matures every week,) and if I don't need the money, roll into a new one). Pays better than any of the savings accounts I have.

 

[skumar]

@joyfulservant77 Thank you for your response.

1. Are the prices per 100 dollars always at like 98 or are they sometimes less $98?
2. What are your thoughts on 4 week t bills, can one expect a decent amount of return?
3. What is the ladder thing everybody keeps taking about? Can you explain how this all works?

 

[joyfulservant77]

@skumar

Are the prices per 100 dollars always at like 98 or are they sometimes less $98?

All depends on the interest rate at the weekly auction. This is the page I got the latest rate/100 at.

https://www.treasurydirect.gov/auctions/announcements-data-results/

Then click on the CUISP number ad it will show you the cost/100

What are your thoughts on 4 week t bills, can one expect a decent amount of return?

Right now it's over 5%. Backed by the full faith and credit of the US Government. You can get higher rates with other bonds, but they carry risk.

What is the ladder thing everybody keeps taking about? Can you explain how this all works?

Lets take the 4 week t-bills. My ladder is every week for 4 weeks I buy a set amount of t-bills. Lets say 5,000 each week (for my return, so around 4,980). At the end of 4 weeks I've invested 20,000. week number 5 the first t-bill matures. Two things can happen. I do nothing and my account (or bank account) gets a deposit of 5,000. Or if I don't need the money, I set it to re-invest at the current rate and my account (or bank account) gets a deposit of 20 (maybe a little more, maybe a little less depending on the current rate) AND I get a new t-bill at the current rate that will mature in 4 weeks for 5,000 again.

Some thing with 8 week t-bills. Purchase 1 a week for 8 weeks.

With my bank . . . I have a CD ladder. These one's are 12 month CD's. Took me a few years to build the ladder, but every month I have a CD that matures with enough to cover 1 full month of my living expenses. I don't need it? It rolls over into a new 1 year CD. The bank CD's pay interest monthly back into the CD. So a 5,000 CD that I started 2 years ago has roughly 150 more than it did 2 years ago (First round of 1 yr had a super sucky rate, but Now I've got just about all of them over 5%.)

You may see some comments on this that I'm not being smart -- but each person has their tolerance level of risk. My 4-week and 8-week T bills guaranteed by the governemnt. My CD's and other cash accounts are below the FDIC limits, so my money is insured that way. Then I also have a 401k through work, and a taxable brokerage account that I invest in every month.

 

[skumar]

@joyfulservant77 Thank you for this detailed breakdown. How do you feel about buying T-bills on the secondary market and waiting for maturity to sell just to profit off the maturity rather than the annualized interest rate?

 

[joyfulservant77]

@skumar I've never looked into it. I like things a little more liquid -- hence the 4 and 8 week t-bills. My 1-yr cd's I can break any time and the only penalty is a couple months of interest.