Economist Writing Every Day

The interest paid on most bank checking and savings account is still very low.  Bank of America is paying 0.01-0.04% (i.e., practically zero) on savings accounts, and 0.05% (still nearly zero) on a 10-month CD. You can get over 2%, but mainly by opening an account with some little outfit  you have never heard of. Money market funds are offering a little over 2%.

Courtesy of the Fed and its rate-raising, the interest on 6-12 month Treasury bills is now around 4%. Here is a graph of all Treasury bill/bonds (interest rate versus how long till bonds mature). So: Instead of leaving money in a bank account or in your broker’s money market fund, I suggest you take that money, transfer it to a brokerage account (e.g. at Vanguard or Schwab or Fidelity for low fees);  then use that money to buy T-bills. Most brokerages have a simple, automated process for doing that.  Below I will list the complete steps for doing this at Vanguard. (Buying other types of bonds might be more involved).

Example: I bought $10,000 worth of six-month T-bills a couple of days ago. I paid $9,824 for them now (in September, 2022). I can redeem them for their face value of $10,000 in March, 2023. That works out to an annualized interest rate of about 3.8%. (It would have been 4.0 % if I went for a 12-month T-bill). These short-term T-bills do not pay monthly or quarterly interest. You get your interest benefit by buying them at a discount to the face value.

No matter what interest rates or the economy does between now and March, Uncle Sam guarantees that I will get my $10,000. If I want to cash out before then, I can just sell some or all of my T-bill holdings back into the market. Again, no matter what happens, I can pretty well count on getting my full money back.

This is obviously a bit more trouble than just buying share in a bond mutual fund or exchange traded fund (ETF). Why go to this extra trouble? My big reason is that with a bond fund, its value can slosh up or (these days mainly) down by a significant percentage. So you might put $10,000 in today, and have it worth only $9,500 in a couple of months. I don’t mind stock prices flopping up and down, but not with bonds that I might want to cash in at any time.           

If you buy say a longer-term bond, say a five-year Treasury bond, yes, you are guaranteed to collect the full face value in five years, but if you want to sell it into the market a year from now, you may find that its market value has gone down (or up) compared to what you paid for it, if interest rates have changed in the meantime. This adds a layer of uncertainty in managing your money. That is why I am recommending shorter-term (typically 1-year) T-bills.

One other comment on money management: for money you don’t think you will need for at least a year, one of the best places to put it is in U.S. government I-series savings bonds. These I-bonds pay whatever is the prevailing inflation rate, e.g., are paying now 9.6% (!!!). That is an astonishingly high yield for a government guaranteed bond.  Bonus: the interest on I-bonds, like the interest on T-bills and other federal obligations, is typically exempt from state and municipal income taxes.

After holding an I-bond for at least a year, you can cash out at any time for the face value. (There is a modest interest rate penalty for redeeming in less than five years). There are two minor hitches with I-bonds. One is that you have to open a “Treasury Direct” account with the Treasury to purchase (and redeem) I-bonds. No big deal, just another account to monitor and make up a password for. The other hitch is that you can only buy up to $10,000 per year of I-bonds. That said, you should go make the extra effort and put the first $10,000 of your bond-type savings into I-bonds.

APPENDIX: HOW TO BUY TREASURY BILLS IN VANGUARD                           

Once you know how things flow, it only takes a few minutes to complete a purchase. Presumably other brokerages have similar procedures. ( There is a Treasury web site here which with a huge table of all T-bill maturities and current prices, but it’s probably easier to find what you are looking for in the Vanguard system).

( 1 ) On your main (“Holdings”)  display page for your account, choose Transact:

( 2 ) Select the “Trade Bonds or CDs” option

( 3 ) This will bring up a “Check rates and trade bonds” page. Choose your account you want to transact in, and click Continue.

( 4 ) Which brings you to the “Find brokered CDs and bonds” page. For 6-month T-Bills, click as marked in red below:

( 5 ) This brings you to the “Now, select which Treasury you want” page. For approximately six-month T-Bill , probably select the first one on the list (red arrow, below). As of trading day 9/23/2022, that one maturing 3/16/2023 was the closest to 6-months. Note that I paid $98.25 (per $100 face value) for this T-bill. It does not pay monthly interest, but it is guaranteed to be redeemed at $100 when it matures in six months. The effective annual interest rate on this transaction is 3.8%. After selecting which T-Bill, click Continue.

( 5  ) This brings you to the “Next, provide the amount you want to invest” page. Here you input how much money you put into this transaction. Since T-Bills come in denominations of $1000 or more, so you have to input thousand dollar amounts here. (e.g. $3000 or $12000, but not $4500).