What to know before investing in Treasury bills

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Yahoo Finance’s Kerry Hannon explains what T-bills are and how investors can use them to their advantage.

Video Transcript

SHANNA: All right, the Fed is expected to raise rates by 25 basis points next week, and that’s good news for short term savers. One way Americans are taking advantage is through treasury bills, short term securities issued by the federal government. Yahoo Finance’s Kerry Hannon joining us now for more on this. Kerry.

KERRY HANNON: Hi great to be here, Shanna. Yeah, I mean, my gosh. This is one way to take advantage of rising rates, is to look into short term T-bills right? So there’s a different– there’s T-bonds, there’s T-bills, and so you need to get– and T-notes. So they all have different periods, but the ones that’s the shortest are the T-bills. So they’re usually from four– they are from four weeks to 52 weeks in duration. So it’s a great way to kind of jump in for a short duration. The pros of these things are yeah, it’s backed by the federal government. You’re guaranteed to get your money back. And they’re paying rates that are higher than the saving rates at banks, which is no surprise, because banks are a little slower. They’re quick to raise the rates on your credit, but not so much when you are trying to invest money with them. The interest rates creep up very slowly. So these are beating CDs and high yield savings accounts.

So it’s a nice– now it can be– it’s not for everyone, but one of the great things about the T-bill is that you’re not going to pay state or local taxes on these. So this is sort of one advantage, a tax advantage here that you don’t get on investing in a CD or a high yield savings account.

DAVE: So, Kerry, how does someone purchase T-bills and what do we need to know about the different methods?

KERRY HANNON: Yeah, that’s a great question, Dave. It’s a little confusing. There’s one way which is very simple way in theory, is to buy straight from the Treasury yourself, Treasurydirect.gov. It’s a do it yourself. The only tricky thing, it’s a little bit harder to set up your account there. Once you’re set up you’re in good shape, but it can be a little bit cumbersome to get it set up. This is good in a sense that you only– the minimum investment is $100. Now the other route can take is through a brokerage account, and whether it’s Fidelity, or Vanguard, Schwab, whatever, if you have an online brokerage account you can set up and buy Treasury bills directly that way. Now, they generally have a minimum of $1,000 and it can be seamless. In some– if you go through a bank or some other financial institutions, you might have a separate commission on this, but the big guys don’t generally charge you if you have a brokerage account there. But again, it is something to consider which way you want to go.

OK, Kerry Hannon, great stuff. Really appreciate that.