When looking to replace the risk associated with the stock market while it decides what it wants to do, consider looking at the safety of US Government securities with no risk to the investor. Commonly referred to as Treasury Bills (T-Bills), these securities are very appealing due to the shorter-term duration and the risk-free nature of these investments. Like other investments, T-Bills may only be suitable for some investors, and consulting your financial advisor before purchasing is advised.
What are T-Bills?
T-Bills are short-term debt instruments the US Government offers through regularly scheduled auctions that anybody can purchase with $100 minimum investments. The US Government then uses your money for the duration you select, 4,8,13,26, or 52 weeks, to fund the government's needs and then returns the principal and interest at maturity. Investors can open accounts on the government's website, www.treasurydirect.gov.
Let's say you purchase a $10,000 T-bill with a discount rate of 5% that matures after 52 weeks. Initially, you pay $9,500 for the T-bill at the auction. Once the year ends, you receive your initial investment of $9,500 plus another $500. There are no transaction fees associated with T-Bill purchases from Treasury Direct.
An investor can build an initial T-Bill ladder using different maturities. For example, they may choose to purchase a 4-week, an 8-week, and a 13-week during a week of T-Bill auctions. As the 4-week matures, the investor would buy a 13-week T-Bill with the proceeds. Now their portfolio is an 8-week T-Bill and two 13-week T-bills. As the 8-week T-Bill matures, the investor buys a 13-week T-Bill with those proceeds. Now the investor's portfolio has three 13-week T-Bills in it.
These particular maturities allow the investor to have a T-Bill maturing once per month and allow flexibility in investing the maturing proceeds if a new stock market opportunity arises.
Taxes?
Unlike stocks, T-Bills only have a Federal tax and no Local or State tax. Each year you will receive a 1099-INT from the Treasury Department and pay Federal taxes at your current tax bracket level.
Yields currently offered, subject to change (higher or lower)
Each maturity provides a yield that changes throughout the day, and now, they range from 5.25% to 6.0%. Once you purchase a T-Bill, the yield is locked in.
As long as the Federal Reserve remains in a tightening bias with interest rates, we can expect T-Bill yields to increase, making them even more attractive.
Safety of T-Bills
Warren Buffet, Berkshire Hathaway, commented that they will always have significant cash and funds in US T-Bills to avert any crisis-like situations.
All US Treasury securities are backed by the full faith and credit of the US Government against any losses.
The US Government has never defaulted on an obligation (loan), and regardless of the media hype in the current Debt Ceiling debacle, investors can rest assured that their investments are safe.
Selling T-Bills before maturity
Most T-Bill investors hold their securities until maturity due to their short duration. However, due to the liquidity of the T-Bill market, they can be sold in the secondary market before they mature.
According to the Securities Industry and Financial Markets Association (SIFMA), US government debt's average daily trading volume exceeds $630 billion, enabling investors who wish to sell before maturity to always find a buyer.
Tracking Yields
Barchart allows investors to track the yields of T-Bills using these symbols:
In closing…
The stock market is currently creating excessive volatility in investors' accounts as it continues searching for a long-term direction, increasing fear, indecision, and other emotional problems for the investor. If left unchecked, these emotions could cause an investor to sell out at the bottom of the move as they eventually give up and want what's left of their cash back.
Treasury Bills offer an alternative way to safely receive income from the US government during these turbulent times to help offset the losses in investors' equity accounts.
Talk with your financial advisor and see if T-Bills fit your investment strategy.
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