As the US Fed continues to increase the federal fund rate to 3.75%-4% in Nov 2022, if you have ideal cash sitting in a normal saving account, you should start looking at high yield saving account (HYSA) or buying US Treasury Bills. Why?
Earn interest rate of about 4%
This is the latest results from the US treasury regarding the treasury bill interest rate. Let’s take the shortest duration (4 week treasury bill) as example, the most recent issue (Dec 06 2022) has an interest of 3.95%. In simple terms, by lending money to the US government for 4 weeks, you earn an interest of 3.95%/year. This is almost risk free because basically it is back by the US government, directly from the US Treasury. For every $10,000, you earn about $400/year in interest 🙂
4.5% APY today
After I wrote this article back in Dec 2022, the Fed has continued to increase the interest rate. So as of Mar 2023, the 4-week treasury bill yields 4.6%+. I wrote an updated article about this here.
Interest earned is exempt from all state and local income taxes.
Yeah, you see it right. Unless like your salary, you don’t need to pay state or local income tax for interest earned from treasury bills. You still need to pay federal income tax for this. More information about this here, on the IRS website.
How do I buy Treasury bills?
There are a number of ways you can do this like buying direct from the US Treasury or through a broker. If you want to buy direct from the US Treasury, you can sign up an account on the Treasury Direct website and then proceed from there.
One thing I like about buying from Treasury Direct is that there is a reinvestment function. This is neat because I care mostly about the 4 week bill and I hate having to repeat the same process every 4 week. Read more about the schedule reinvestments here. With this function, I can set up the purchase once and then after 4 week, the system automatically reinvest for me.
Treasury bills are sold at a discount from their face value
What this means is that if you buy $1000 Treasury Bill at 4% interest rate, 4 week duration, you will only pay perhaps $997. Upon maturity, the Treasury will send you back $1000. The difference between $1000 and $997 is your interest earned.
The math is: 4% x $1000 = $40. This is per year, or 52 weeks. So 4 week period is about $3.
Treasury bills are sold through competitive bidding at auctions held by the U.S. Treasury
Simply put, the actual interest depends on supply and demand. For example, the 4 week Treasury bill auctioned on Dec 6 has interest rate of 3.95%; while the one on Nov 29 has interest of 3.97%.
If your capital base is very small, the difference between 3.95% or 3.97% is negligible.
Treasury bill can be sold prior to maturity
Read more here, from Treasury Direct website. As a rule of thumb, I always try to “test the pipe” to ensure that everything is working fine before committing a large amount of cash. You need to try the process to understand how long it takes for you to sell and how soon the sales proceed will be sent back to your account.
If you buy from Treasury Direct, take note of the below:
“In Treasury Direct, when you buy a Treasury marketable security, you must hold it in your TreasuryDirect account for 45 days before selling or transferring it. This means you can’t sell or transfer a 4-week bill from TreasuryDirect because it matures in less than 45 days. This hold also applies to a reinvestment when new funds are added to pay for the new security.”
What’s the catch?
The Fed has been very clear with their communication that they will need to continue to raise rate further from the current level to fight inflation in the US. That means interest should continue to raise from the current level of between 3.75% – 4% to a level that the Fed thinks suitable. So that means if you buy a longer term Treasury Bill (like 26 weeks) or Treasury bond (like 5 years or longer), when the federal fund rate increases, the value of your treasure bill or bond will decrease. That is how the math works so that it can yield a higher interest rate. Hence, for the moment, I care mostly about some of the shortest duration when it comes to Treasury Bills.
With little effort, if you have ideal cash and you want to have a very liquid and almost risk free return, consider buying US Treasury bills. There is tax advantage for this option too so that is a big plus. Of course, as always do careful research before committing any amount of money. Test the pipe i.e. going through the entire process of buying and then selling or reinvesting with a small amount of money before committing a large amount of money.
Last but not least, I recently created a group on Facebook called Asian Expats in the US so that we can share/discuss more tips directly. Feel free to join.