Archive for the 'Treasury Bills and Bonds' Category
The Treasury recently announced that as of April 7th minimum investment amount for government bonds will be lowered to $100 (previously $1,000). This includes all Treasury marketable bills, notes, bonds and Treasury Inflation-Protected Securities (TIPS). Thanks for the e-mails.
This means you will be able to build a weekly Treasury Bill ladder for as little as $400. Unfortunately, right now yields are so low that I have no reason to bother. The last T-Bill auction resulted in an investment rate of only 0.527% for the 4-week T-Bill, 1.337% for the 6-month T-Bill, and 2.045% for the 2-year T-Note.
Even TIPS are so much in demand that some of them have been trading with a negative real yield. If you are interested in inflation protection, especially for mid-term periods like 5 years, it may be better to simply buy a Series I Savings Bond, which right now has a real yield (fixed rate) of 1.2% through April 30, 2008. You can buy those already for as little as $25 via TreasuryDirect.gov. (There is a purchase limit of $5,000 online and $5,000 paper, although people have reported being able to buy more online.)
Posted in Treasury Bills and Bonds | 7 Comments »
Over a year and a half ago I shared how I juggled my bank accounts to maximize interest. It was the best I could do then, although it was a bit annoying as transfers between banks still took a couple of days.
My current set up now involves fewer banks, but I feel it is also both more convenient and earns higher interest. However, whether or not it would work for others depends on their geographic location.
Washington Mutual - WaMu has a strong branch presence in my area, and there are also ATMs in the grocery stores. Since they started offering their Free Checking and 5% Savings account combo (must open online; you won’t find this advertised in any branch), I have started using it as my primary account due to the combination of convenience, decent interest, and lack of fees.
I can keep a minimal amount of money in the no-fee checking account for my daily cashflow needs, and then a larger chunk can be kept in the savings account to cover the larger monthly bills paid via scheduled online BillPay transfers. If I need to write a big check or send a wire transfer, I can just move money over from the savings account. Also, I still receive a lot of checks so I like the ability to deposit them directly into my savings account. Overall, this keeps a good chunk of my money instantly accessible yet earning decent interest.
For reference, see my WaMu Free Checking + 5% Savings review and how to fund them directly with existing WaMu accounts.
28-Day Treasury Bill Ladder - Again, this may not work for others because the main draw of T-Bills is that the interest paid is exempt from state and local income taxes, which increases their equivalent yield. For those without state income taxes, they have been yielding around 5.1%-5.3% APY. However, for those that do have such taxes, the equivalent yield is significantly higher. Mine is closer to 5.8%-5.9% APY. Thus, the money I can’t see myself needing in less than 28 days (most of it) is kept here.
In addition, I can link TreasuryDirect to my WaMu savings account, so there is no interest lost during transfers. The money is invested immediately into a Treasury Bill upon withdrawal, and upon maturity the money is immediately deposited back into my savings account.
For more information, please see my entries on converting Treasury Bill auction results to equivalent bank interest rates, and how to build a T-Bill ladder.
Posted in Banking, Treasury Bills and Bonds | 65 Comments »
If you earned any interest from Treasury Bills or Savings Bonds last year, and are subject to local or state income taxes, be sure note it on your tax returns! Interest from federal debt obligations such as these are subject to federal tax, but not state or local income taxes. Here are some tips and examples to make sure you file correctly and get all the money that’s owed to you.
First of all, you have to manually go and print our your 1099-INT forms from TreasuryDirect.gov, if that’s how you bought or sold the securities. Go to Manage Direct > Manage My Taxes > Year. It’s not elegant, but at least they provide it… (You can also try calling 1-800-943-6864 to request one be sent to you.) On your federal return, there should be nothing specific to note as they are fully taxable at that level.
If you use online tax software for your state/local income taxes, look very carefully for a question that asks if you need to make any adjustments to your federal income numbers, or if you have any interest from government obligations or debt. If you go to an accountant and they don’t know how to do it - fire them 
To find out the applicable lines on the paper forms, first locate your appropriate state tax form in PDF format. It might be a good idea to start with the most general all-encompassing form. Then run a search in Adobe Acrobat for “bonds” or “subtractions” or “adjustments”. You are basically looking for the area where you make adjustments to the federal income figure. You may be referred to a supplemental form. Visually skim for keywords like government bonds, savings bonds, treasuries, or treasury bonds.
California Example
- I’ll start with Form 540 [pdf], the most general form.
- See per the Form 540 instructions that “If there are differences between your Federal and California income or deductions, complete Schedule CA (540) - California Adjustments
- Per the Schedule CA instructions: On line 8 enter in column B (Subtractions) any interest from U.S. Treasury bills, notes, and bonds (and also most U.S. Savings Bonds).
- Finish the schedule, transfer the appropriate value to line 14 of Form 540, and now your California taxable income should ignore any government debt interest.
Oregon Example
- I started with Form 40.
- In the “Subtractions” area, I see Line 16 - “Interest from U.S. government, such as Series EE, HH, and I bonds”. This is where I put in the interest from T-Bills as well.
Posted in Savings Bonds, Treasury Bills and Bonds | 9 Comments »
I’ve been getting a flurry of questions about comparing Treasury Bills to bank accounts. Here is a step-by-step walkthrough to make it from the weekly auction results to a bank’s quoted APY interest rate.
1. From the recent auction results page, grab the investment rate (not discount rate). This is APR. It is based on a 365-day year and reflects the actual annualized rate to maturity. Here’s the most recent snapshot:
Let’s take the 28-day T-Bill, which has an APR of 5.247%, or 0.05247.
(If you want to learn more about how the other terms and the relationship between “Discount rate” and “Investment rate”, please see this post on T-Bill terms.)
2. Convert it to APY. APY, as opposed to APR, takes into account the effect of compounding interest. It’s also a higher number, which is why most banks just tell you the APY. An approximate way to convert it to APY is using this formula:
APY = (1 + (APR/PeriodsInAYear) )^(PeriodsInAYear) - 1
For our case, the APR is 0.05247 and PeriodsInAYear= 365/28. Solving for APY, you get 0.05376, or 5.376% APY.
This is only a approximation because you can’t actually reinvest all of the money continuously. For example, you might get back $1,000 from your first T-Bill, but can only reinvest $995 of it in the next T-Bill. The rest must sit in a savings account at best. For 28-day T-Bills, you can get a more accurate number using my 28-Day Treasury Bill APY Calculator.
Assuming a 4.89% APR/5% APY savings account, you’d get 5.367% APY, a bit less. If you don’t pay state or local income taxes, you can stop here. As you can see, it’s very competitive with online savings accounts.
3. Find Your Tax-Equivalent Rate. Treasury Bills are exempt from state and local taxes. Thus if you are subject to such atrocities ;), then your T-Bill rate is actually better than that of a fully-taxable bank account. This is one use for my tax-equivalent yield calculator. You’ll need to know your tax rates and whether you itemize taxes.
Let’s use the 5.367% number from Step 2 and my own tax situation. For 2007, I’ll probably be in the 28% bracket federally, 9% for state, and will itemize. For this specific T-Bill, my final number that I should use to compare to banks is 5.898% APY. Your number will probably vary.
Yes, there are a lot of variables to get the conversion just right. Sorry!
If you are interested in investing in Treasury Bills, please also see my visual guide to building a T-Bill ladder to maximize your returns and also liquidity.
Posted in Treasury Bills and Bonds | 20 Comments »
So you’re interested in buying some Treasury Bills for the potentially higher returns, but aren’t exactly sure how to set it up. Well, this guide is for you! I’ve been laddering T-Bills for over a year now in order to maximize the profit out of my existing house downpayment savings and also my 0% balance transfer schemes.
Quick Facts
- Treasury Bills are purchased at a discount and redeemed at the full par value. So for each $1,000 worth, you’ll pay ~$99x dollars upon issue and receive $1000 upon maturity.
- Rates are set by auction, so you will not know your exact interest rate before you commit to buy. However, if you are in a high income-tax state the chances are very good that it will be better than similar savings accounts.
- Auctions are held on Tuesdays, and the T-Bills both issue and mature on Thursdays.
- You must schedule the purchase before Noon EST on the auction date (Tuesdays), otherwise you are pushed to next week.
- The transfer of money to/from your bank account upon purchase/maturity is very timely. Thus, if one Treasury Bill matures (deposits $1,000) and another is issued on the same day (withdraws $995), your bank account will have a net positive $5 balance at the end of that day.
Visual Guide To Setting Up A Treasury Bill Ladder
Laddering is a method of purchasing that increases the liquidity of fixed term investments such as Treasury Bills. Imagine if you bought a T-Bill every week, and each one lasts for 4 weeks. After four weeks, you could simply use the proceeds of your first T-Bill to purchase your fifth T-Bill. The week after that, you could use the proceeds from your second T-Bill to purchase your 6th T-Bill, and so on forever. If you stopped buying T-Bills, you would get $1,000 back each week until all have matured.
Since each T-Bill has an investment minimum of $1,000, you would need to commit 4 x $1,000 = $4,000. If you don’t have enough, you can simply buy them at less frequent intervals. Below are four visual examples for buying them every month, every two weeks, and every week:
$1,000 Minimum - Buy a T-Bill Every Month
Assuming a discount value of $995:
Week #1: T-Bill #1 will be issued on Thursday (net taken from bank account: -$995)
Week #5: T-Bill #1 will mature (+$1,000) and T-Bill #2 will be issued (-$995) on Thursday (net: -$990)
(and so on…)
In some months, there may be a gap between the T-Bill maturing and the next one issuing, but you should never have more than $1,000 invested “outside” in T-Bills. However, you may have to wait up to 28 days for your money to come back to you.
$2,000 Minimum - Buy a T-Bill Every Other Week (Bi-Weekly)
Read the rest of this entry…
Posted in Treasury Bills and Bonds | 38 Comments »
Here is brief roundup of the top rates for short-term cash accounts with moderate balances.
Online Savings Accounts, No Minimum Balance
HSBC Direct continues it’s 6.0% APY rate on new money until April 30th, and you can open with $1. The highest non-promo rate is from Amtrust Direct at 5.36% APY, although you must open with $1,000. Overall, rates seem to be stable as of late.
Nationwide Brick and Mortar Accounts, No Minimum Balance
Washington Mutual continues to top this area, with their WaMu 5.0% APY Saving Account. You have to open online, but after that it has all the advantages of a local branch savings account; You can transfer instantly to/from their Free Checking account, deposit directly into savings via ATMs or tellers, and take cash directly out via ATMs.
28-Day Treasury Bills Possibly Good Alternative
If you are subject to state income taxes and have cash reserves that you don’t need immediate access to, you should definitely look into Treasury Bills. Rates change weekly, with the most recent auction results showing a 5.267% investment rate. Using my 28-Day T-Bill APR-to-APY calculator with my new Tax Equivalent Yield Calculator, along with an assumed 25% federal/9% state tax bracket, that is the equivalent of a taxable interest rate of 6.12% APY. Treasury Bills are backed by the full faith of the government, and also come in 3-month and 6-month terms.
The downsides to T-Bills include the fact that you will give up some liquidity and they must be bought in $1,000 increments. For more information on how to buy them online and building a T-Bill ladder, please read the posts in my Treasury Bill category archives. Look for a new visual how-to guide coming soon.
Personally, I continue to purchase T-Bills with a portion of my cash balances as I live in Oregon with a 9% state rate. It is actually very easy to have to money transferred to and from your existing high-yield bank account. For example, if you have $30,000 sitting in a bank, you might commit $20,000 to Treasury Bills and keep the rest 100% liquid. It all depends on what you feel comfortable with.
Also see: Rate Chaser Calculator.
Posted in Banking, Treasury Bills and Bonds | 4 Comments »
There are many investments out there that are exempt from certain taxes. For example, U.S. Savings Bonds and Treasury Bonds are exempt from state and local income taxes. In addition, there are money market funds available that are exempt from federal income tax and others that are even exempt from a specific state or city’s income taxes.
Therefore, it is desirable to know what the equivalent fully-taxable rate is for one of these investments. For example, is it more profitable to earn a federal tax-exempt interest rate of 3.8% or a fully taxable 5.0%? How about a Treasury Bill paying 4.8%? Several variables affect this rate, including your marginal tax brackets for each area, as well as if you itemize your state and local taxes on your federal tax return. I could not find a calculator that accurately captured all of this, so I made my own.
Example
Let’s say you live in California, and your marginal federal tax rate is 25%, your state rate is 9.3%, and you have no local income taxes. You do not itemize your taxes. You are trying to compare the taxable Vanguard Prime Money Market Fund (VMMXX, yielding 5.08%), the federally exempt Vanguard Tax-Exempt Money Market Fund (VMSXX, yielding 3.48%), and the state and federal tax-exempt Vanguard California Tax-Exempt Money Market Fund (VCTXX, yielding 3.38%).
With that profile, the tax equivalent 7-day yields would be 4.804% for VMSXX, and 5.145% for VCTXX, making the California Tax-Exempt Fund the best bet currently for this specific situation.
How It Works (Warning: Math Ahead!)
The calculator computes the tax-equivalent rates by comparing after-tax returns. That is:
AfterTaxReturnEquivalentTaxableRate = AfterTaxReturnTaxAdvantagedRate
Using the California Tax-Exempt Fund example above:
EquivalentRate x (1 - FederalTaxes - StateTaxes) = 3.38%
EquivalentRate x (1 - 0.25 - 0.093) = 0.0338
EquivalentRate = 5.145%
So earning 3.38% free from federal and state taxes is the same as earning 5.145% in a fully taxable account.
Note that itemizing deductions means that you deduct your state income taxes from your federal taxable income. The effect is that your overall tax liability is reduced, which lowers the benefit of any tax-exemptions and thus the equivalent rates. That would change the previous equation to:
EquivalentRate x (1 - FederalTaxes - StateTaxes + (FederalTaxes x StateTaxes)) = 3.38%
EquivalentRate = 4.969%
The inclusion of this option may give different results from some of the other online calculators out there, but I believe it makes the results more complete. Another fully-worked-out example can be found here for savings bonds.
Finally, it may be handy to use this in conjunction with my Ultimate Interest Rate Chaser Calculator. Be sure to compare APRs to APRs and APYs to APYs.
Useful Resources
2007 Federal Tax Rates
State Income Tax Rates
Recent Treasury Bill Auction Results
Savings Bonds Rates
Posted in Banking, Savings Bonds, Tools & Calculators, Treasury Bills and Bonds | 17 Comments »
For those subject to state income taxes, Treasury Bills continue to be a good alternative to online banks since their interest is exempt from state and local income taxes. For example, at their current rates my personal tax-equivalent yield is over 5.70% APY. You do lose some liquidity though, so I don’t keep every penny in there. For more information, please check out the following posts in my T-Bill category:
How To Buy A Treasury Bill Online
Taxable Equivalent Rate Calculator
Calculating and Comparing Treasury Bill Returns
28-Day Treasury Bill APY Calculator
Posted in Treasury Bills and Bonds | 22 Comments »
I logged into my TreasuryDirect account today, and what do I see?
Posted in Treasury Bills and Bonds | 25 Comments »
In my previous post on Calculating and Comparing Treasury Bill Returns, it was pointed out that my APY calculation was incorrect because the way T-Bills work, you can’t actually reinvest all the interest into the next T-Bill. That is true, but what you can do is set your T-Bill to fund and deposit via another interest-bearing account like ING Direct, Emigrant Direct, or HSBC Direct. This way, you can still invest in consecutive 28-day T-Bills, and anything not rolled over to the next T-Bill is still earning decent interest.
But, we still want to compare APYs! So, what was needed was a calculator that would take all this into account. So here it is:
Read the rest of this entry…
Posted in Tools & Calculators, Treasury Bills and Bonds | 16 Comments »
Just like when teaching class, if one person asks question, usually multiple people have the same question. Unless it’s that annoying person who always ask questions like “Do I have to put my middle name on the exam? Will you mark down for that?”
Anyways, someone asked how to calculate and compare T-Bill returns to online banks, even without adjusting for tax. I’ll base this off of the recent Treasury Bill auction results. Let’s take the most recent one:
Read the rest of this entry…
Posted in Treasury Bills and Bonds | 26 Comments »
Where’s my cash? Back in December, I started forming a ladder of 6-month Treasury Bills by buying $1,000 of T-Bills at the beginning of each month. Soon, I will start reinvesting the first matured T-Bill into another 6-month T-Bill, thus having $6,000 spread out in total. So far, the strategy has worked very nicely, giving me an average equivalent taxable yield of about 5.5% (for my tax situation) in exchange for a little less liquidity. Still, I have access to $1,000 each month, and if I really need to, I can always use SellDirect to sell the rest at market value with a $45 fee.
I plan on ramping up to $2,000 a month, but the rest is mainly in online savings accounts because much of it is from various 0% APR balance transfer deals, and I like to be able to pay off the entire balance whenever I want. The last bit of my cash is in some longer-term CDs and I-bonds.
Posted in Treasury Bills and Bonds | 8 Comments »
There seems to be some interest, so here’s a very quick example of what happens when you buy a 4-week $1,000 T-Bill.
1) Open an account at TreasuryDirect, link up checking/savings account.
2) Login, and select your amount and maturity date ($1,000)
3) You must schedule the purchase before Noon EST on the auction date (Tuesdays), otherwise you are pushed to next week.
4) Auction occurs on Tuesday, and on Thursday the discounted amount ($99x.xx) is taken out of your account.
5) 28 days later, also on a Thursday, $1000 is put back into your account if you choose so. If there is a holiday both the purchase and maturity dates are moved together. I’ll do a better example later.
Posted in Treasury Bills and Bonds | 25 Comments »
People who are looking for the next best place for their cash now that ING’s Winter Sale 4.75% APY sale is over, and HSBC Direct’s 4.80% APY promotion is soon ending, should not forget to consider Treasury Bills. You sacrifice some liquidity, but recent 28-day T-Bills have been paying 4.50-4.60% interest. Since the interest is exempt from state and local taxes, the equivalent return (calculator) can easily top 5% for those in many states. I know you can even link TreasuryDirect up with Emigrant Direct and HSBC, but I’m not sure about ING Direct. Anyone try?
You can see my T-Bills experiences here in reverse order. Auctions for T-Bills are on Mondays and Tuesdays, so if you want in for next week you should schedule them soon.
Posted in Treasury Bills and Bonds | 16 Comments »
Although I messed up my Treasury Bill Ladder by switching to 6-month T-Bills, they continue to be a pretty good cash investment alternative for those people in states with high income taxes, as they are exempt from such taxes. For example, the most recent 6-month T-Bill paid a rate of 4.754%. Using my Equivalent Rate Calculator, and a federal tax rate of 25% and state tax rate of 9%, that’s the equivalent of a regular 6-month bank CD paying 5.40%. The 4-week T-bill equivalent rate is 5.07%.
For all my posts on Treasury Bills, please see here, reads bottom to top.
Posted in Treasury Bills and Bonds | 40 Comments »
