My current 4-week T-Bill ladder has been working smoothly, with the money going in and out of the C of I so that I don’t have to do anything but watch the interest add up. But, this week’s T-Bill auction results gave a disappointing 3.63% rate, which is the post-tax equivalent of 4.13% APR for me. I can already get that at Presidential Premier Savings.

So I think I’m going to switch to 6-month T-Bills. I chose 4-week T-Bills for their relative liquidity, as I wanted to use it as an emergency fund. But since I usually have enough cash in various accounts while earning bank bonuses, I want to grab higher yields. My savings horizons are longer than 6-months too. The recent 6-month T-Bill rates are about 4.33%, or 4.92% APR bank equivalent for me. That’s much higher than any 6-month bank CD. I think I may be getting too obsessed with optimizing my cash returns, but it only takes a few clicks =)

I now have 4 consecutive 4-week Treasury Bills as a ladder, so next week one will mature and I will buy another 4-week T-Bill the same day with the proceeds. I’ll keep this rotating money as my emergency fund until the rates are non-competitive. For now, I’m averaging the equivalent of a 4.5% bank APY with only slightly less liquidity.

(For the history on me building this T-Bill ladder, please read the entries in my Treasury Bills Category)

One bad thing about purchasing Treasury Bills at TreasuryDirect is that you don’t know the exact return of the T-Bill before you buy it. An interesting idea around this was presented by commenter Dan when I first posted about buying T-Bills:

You don’t have to commit until you know the price. 1. Schedule the transaction. 2. The auction will be on Monday for 3- or 6- month T-bills and Tuesday for 1-month T-Bills. 3. On Wednesday, look at your pending transactions. … At the bottom of the page, you have two button options. … “Delete” (which I assume means cancel the transaction, though I haven’t done it myself).

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Reader Dan pointed out an interesting (well, kind of) research article [pdf] that, amongst other things, explains how Treasury auctions work. As stated on the Treasury Direct site, you can buy T-Bills through either a competitive or non-competitive bid. On the surface, it would seem that you would want to put in a competitive bid to get the best price. But it’s a little fuzzier than that. If you put in a noncompetitive bid, you are just about guaranteed a bill to buy. Everyone else put in a bid for what they are willing to pay, but may not get it.

After reading the article, I put together a little example on how the bidding process works. As usual, please point out my blunders.
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Treasury Bills are usually issued on the same day each week, making it easy to re-invest T-Bills at maturity. Someone brought up a good point – what if that day is a holiday? Reader Dan pointed out that the Treasury already thought of that, and adjusts the issue and/or maturity 1 day accordingly. For example, 4-week (28-day) T-Bills are usually issued and matured on Thursday, but next week Thursday 11/24 is Thanksgiving. So, the T-Bill issued on 10/27 is actually a 29-day T-Bill, maturing on Friday 11/25. Accordingly, there is a 27-day T-Bill scheduled for issue on that Friday too. They all match up, so at least that’s one less thing to worry about.

I’ve also added a new category devoted to Treasury Bills and Bonds and moved all related entries there.

It turns out automatically reinvesting Treasury Bills upon maturity is pretty straightforward, according to this TreasuryDirect link. I must say, there is a lot of information on all those government sites, but they sure make it hard to find it!

For example, for 4-week T-Bills, they both mature and issue on Thursdays. But if you set your maturing T-Bills to pay out into a Certificate of Indebtedness (C of I), and your to-be-issued T-Bill to fund from the same C of I, then the maturing T-Bill will first pay out money into the account before the 2nd one takes it out. So (most of) your money will effectively be “reinvested” into another T-Bill.
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Thanks to reader Brent who reminded me that the new Treasury Bill auction results are out today. The 4-week, 13-week, and 26-week are paying 3.997%, 4.004%, and 4.345% respectively. This bodes very well for the 4-week T-Bill ladder I am currently building. Last week I bought a $1,000 4-week T-Bill at 3.885%, this week I’m getting another one at 3.997%, which is the equivalent bank rate of 4.54% for my tax situation. I’m going to be setting up a 4-week auto-renewing ladder at TreasuryDirect once I have 4 of these bought. That way they’ll just cycle through each other, renewing automatically at maturity, and I won’t have a thing to do but watch the interest pile up (and faster than at Emigrent Direct). More later.

A commenter asked how do you predict rates for T-Bills, which I have been buying. I have no idea. I’ve never even taken Econ 101. I did a search and found this [pdf] article titled ‘Using Federal Funds Futures Rates to Predict Federal Reserve Actions’. If someone wants to read that and see if it helps, be my guest. From what I read, the conclusion was “yeah you can try, but not very accurately”.

Since I’m on an Excel kick right now, I found some historical data on the Fed Funds Rate and previous 4-Week Treasury Bill rates. I graphed them together, along with a trendline of the 4-Week T-Bill rates:
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I was bored, so I did some comparison of T-Bill rates vs. equivalent bank rates and actual bank account rates for various combinations of Federal and State tax brackets. Yes, I’m weird. As expected, if you don’t pay state or local taxes, T-Bills are pretty bland. However, if you are in a higher income tax bracket or in a heavily-taxed area, they can become pretty attractive.
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So I the $1,000 28-day T-Bill that I scheduled for purchase last week was issued today without a hitch. I knew the rate was 3.885% (exempt from state and local income taxes), as the auction was on Tuesday and announced on their Recent T-Bill Auction Results page. The issue date was today, and right on time today I see a debit of $997.03 from my checking account. It also showed up online in my Treasury Direct account. After 28 days, on 12/8, I will have an even $1,000. Not so exciting when you think of it as less than 3 bucks. 🙂

But if you think of it as an equivalent CD return, that’s the same return as a 4.41% 1-month bank CD, based on a 25% marginal federal tax bracket and 9% marginal state tax. (If you are in higher brackets your return is even better). I’m thinking a T-Bill ladder with 28-day T-Bill rungs…
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I was snooping around the U.S. Treasury website looking up stuff on potentially laddering I-Bonds, when I came across Treasury Bills again. Treasury Bills are short-term investments (from 4-26 weeks usually) that common folk like us can also buy at TreasuryDirect.gov. The minimum investment is $1,000, and you buy them at a discount to their face value. In their example, you might pay $970 for a $1,000 T-Bill. I’ve never really bothered to learn much about them though, since their yields recently have beem much lower than online savings accounts like EmigrantDirect. For example, a recent rate for a 29-day T-Bill is 3.696%.

But, one key thing is that interest earned from T-Bills are exempt from state and local income tax. For example, if you were in the 28% federal tax bracket, and in a 10% marginal state income tax bracket, that’s 3.696% turns into 4.29%!!
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