Treasury Bills – The Disadvantages — Know Before You Buy

Treasury Bills (T Bills) interest rates are on the rise and becoming more popular. T Bills can be a great way to save for short term needs (52 weeks or less). What should you know about these before you buy? This video discusses the relative cons of purchasing T Bills.

Hi guys welcome back to father and son investing you know this channel has talked a lot about eye bonds recently they are a fantastic way to get a nice return on your money because the inflation rate is so high right now however eye bonds have some limitations one in particular is that you’ve got to hold it for at least 12 months before you can redeem it well

Recently another investment tool or savings tool has also had its interest rate increase and those are treasury bills so today we’re going to talk about four things that i consider disadvantages for treasury bills the other video that i’ll do today is going to talk about the advantages that i see in treasury bills now don’t get me wrong i think that treasury bills

Are great or i wouldn’t be talking about them here but you need to understand that there are some disadvantages or things that you need to know that might not work well for you if you’re interested in buying treasury bills the first disadvantage that i see is you don’t actually know what you will be paying for your treasury bill you do know what it will be worth

But you don’t actually know what you’ll be paying for it and why is that that’s because treasury bills are sold at auction there is an article that goes into great detail written by the new york fed describing the auction process i’m not going to bore you with that rather than bore you with that article just use an example from investopedia of how this works in

Their example they say suppose the treasury is seeking to raise nine million dollars in one year treasury bills with a five percent discount rate that process actually goes to competitive bid while the treasury may like to sell it at a five percent discount rate there may be people who aren’t willing to purchase it at that five percent so it goes to a competitive

Process now these are by big financial institutions in fact there are 24 of them that are required to bid on this we as individual investors aren’t required to bid on it but we get to get the winning price which is kind of a nice thing so if they are seeking to raise nine million dollars they were looking to get it at five percent and there was 1.5 million dollars

Worth of money willing to buy it at five percent however there were some people who or some institutions who were willing to buy it at an even less discount or better discount to the government so we see one million at 4.79 percent and there were some people who were willing to buy it at a bigger discount rate meaning more expensive to the government with the top

Bid being 5 million at 5.5 percent now if they’re looking to raise 9 million what the government will do is start with the lowest bids and work upwards until they get to the dollar amount that they’re seeking to get so we have 1 million here we take another 2.5 million so 3.5 we had two we’re at 5.5 and then we had 1.5 million so we’re at 7 million they still need

2 million more so they’ll go to this bid here 5.07 percent and they’ll only take 2 million of the 3 million once they’ve reached that 9 million that is the cutoff now if you’re getting confused by that term discount rate think of it like this we know what the future value of the treasury bill will be but we don’t know exactly what we’re going to be paying for it

Until the auction has concluded the difference between what you will pay and what you will receive at the end when it matures is going to be that discount rate all right disadvantage number two that i see for treasury bills the interest rate is only paid at the maturity date if you buy a four-week treasury bill at the end of four weeks you will receive the price

You paid plus the interest on that price which will always equal the par value of the treasury bill so if you buy a hundred dollar treasury bill you’re going to pay that price minus the discount rate you will get that interest which is the discount rate essentially and that will be what you receive as a payment but you have to wait four weeks to obtain it so you

Need to know ahead of time just how much money you’re willing to lock up for a certain period of time in general the longer that you’re willing to lock up your money the better the interest rate that you will receive if we look here at the latest four-week auction result we’ll see that it’s 2.92 percent is the interest rate but if you’re willing to tie it up for

Eight weeks you’ll get three point two three percent again these are annualized rates however if one was willing to lock up their money for 52 weeks then they’ll receive almost four percent but remember that that interest is only paid at the maturity date now there are ways to sell your bond ahead of time but we won’t go into that all right the third disadvantage

That i see for treasury bills is that they are on a set schedule some are weekly and some are sold monthly and you need to be able to keep track of that schedule if you want to get in on the purchase now it is possible for us to follow a schedule but just remember that these aren’t as simple as being able to purchase a stock which you can do monday through friday

Except when there is a federal holiday now the government is kind enough to publish a schedule and they even color code it so that you can see what type of security you are interested in and what day it is being sold at auction we are interested in treasury bills here the government provides an announcement date an auction date and the settlement date you will see

That the announcement date is going to be for the four week and eight week treasury bills on tuesdays and the auction date then will be the following thursday so two days later you will see that for the 13 week and 26 week treasury bills the announcement date is on thursday and the auction date is the following monday lastly the 52-week treasury bill is announced

On a thursday and is sold on the following tuesday and these treasury bills only sell every four weeks while this is not a huge disadvantage it is something to keep in mind again it’s not as easy as purchasing a stock or an etf the last disadvantage that i want to talk about for treasury bills is there are some limits on their liquidity now different than an i bond

Which cannot be sold to somebody else a treasury bill can be sold to somebody else but it depends on what type of account you hold your treasury bill in and it depends on the length of maturity now this is spelled out very well for people who hold their treasury bills in their treasury account i mentioned that there are some limits on liquidity the first

Thing is that if it’s in a treasury account you have to hold the security for 45 days before you can sell it or transfer it what what does that mean if you hold a four-week treasury bill it means that you can’t sell or transfer that four-week treasury bill from treasury direct because it will mature in less than 45 days now this limitation applies to

Treasury accounts if you hold your treasury bill with a bank a broker or a dealer then you need to contact that bank broker or dealer to find out how to go about selling just know however that if you are selling your treasury bill with a bank broker or dealer there may be some fees involved and you may be dealing with some bid ask spread what am i talking

About you may want to sell your bill for its full price but the person who’s willing to buy it to give you cash now might not be willing to pay that at full price why would they so therefore there is a chance that you could end up receiving less for your treasury bill than you actually paid for it so those are the disadvantages that i see for treasury bills number

One you don’t actually know how much money you’re going to be paying until the auction is complete number two you don’t get that interest until the bill reaches its maturity date number three you need to keep track of the schedule that’s doable but again not as easy as buying a stock and number four just understand that there can be some limits on liquidity if

It’s in a treasury account and that you may not receive the full price or what you want for your treasury bill if you try to sell it with a bank broker or dealer i hope this information was helpful for you there’s also a video on the advantages of treasury bills i hope that they’ll you will watch that as well share this information with a young person

In your life treasury bills can be a great way for a young person who is trying to save money for a short project the interest rate generally that you’re going to get on treasury bill is better even than a high yield savings account my high yield savings account is giving me 2.15 percent and as you saw for the auction today i’ll be getting an annualized rate of

3.23 percent until next time enjoy your investing

Transcribed from video
Treasury Bills – The Disadvantages — Know Before You Buy By Father ‘N Son Investing