Buying U.S. Treasury T-bills directly from the government with TreasuryDirect

Now that short-term interest rates are either at or closing in on their peak, I've been thinking about putting some of my cash directly into U.S. Treasury T-bills. I'll continue to keep plenty of cash in money market mutual funds which are instantly availble via check, debit card, ATM, or a "quick click" electronic transfer, but as my rainy day cash funds begin to accumulate, a fair amont of that cash isn't likely to be needed every day, week, month, or even quarter, so T-bills seem to have some appeal.

The U.S. Treasury offers a web-based program called TreasuryDirect which allows individuals to link an account at Treasury with their bank account, making it easy to buy Treasury debt (short-term "bills", medium-term "notes", or long-term "bonds", or even Savings Bonds) with absolutely no charges, fees, or spreads, and no paperwork.

New Treasury debt is typically offered via "competitive bid", but noncompetitive purchase is available to individuals like me and you who are buying less than $5 million.

I still don't have all the details figured out, but I opened an account online on Sunday and had my local bank stamp a form with a signature guarantee which I had to mail in. I can't do any redemptions until the paper form is accepted, but I can proceed with purchases. I had to give a lot of identification information as well as my bank account and routing number to open the account online. I may have had to file the paper form simply because I used my new Washington state ID number which I just got on Saturday and which may not yet be in the database that Treasury accesses for verifying my information.

In addition to the standard 3-month T-bill (actually 91 days or 13 weeks), Treasury also offers 6-month (182 days or 26 weeks) and 1-month (28 days or 4 weeks) "bills". You can also buy Savings Bonds via Treasury Direct as well.

I went ahead and entered an order for $1,000 of 28-day "bills" just a few minutes ago. That is the minimum order and increment for purchases. The actual price will be a discount from $1000 so that I will get $1,000 at maturity (four weeks from the date of issue) and the actual interest rate would be calculated by dividing the discount amount by the face value "par" amount.

My order will be dated July 7, but I'm not yet sure when my "bills" will actually be issued. According to the "official" Tentative Auction Schedule, the 4-Week Bill is auctioned weekly on Tuesdays with the issue date being Thursdays. 13-Week and 26-Week Bills are auctioned on Mondays and issued on Thursdays. The schedule says that if the auction would fall on a holiday, which is the case for tomorrow, Tuesday, July 4, 2006, the auction will be held on the next business day, which in this case will be Wednesday, July 5, 2006. It may take a week before the actual Treasury "security" shows up in my account, but that's somewhat immaterial since the only interesting event will be when the full face value is returned to my account in cash four weeks from the issue date.

The TD (that's the "official" shorthand for TreasuryDirect) confirmation screen said that I had been assigned to the "7/5/06 issue" ("Requested Purchase Date"), which I suspect means the issue that will be auctioned on Wednesday, July 5, 2006 and will have the "Issue Date" of Thursday, July 6, 2006.

I don't have any cash balance in my TD account, so I believe that Treasury will automatically initiate a debit against my registered bank account upon completion of the auction or on the date of issue. The fine print on the purchase confirmation screen seemed to suggest this, but we'll have to see.

Whether all of these presumptions are correct remain to be seen. Worst case, maybe I have to wait another week.

There is actually a "cash" account associated with a TD account, but they call it a "C of I" or "Zero-Percent C of I" or "Zero-Percent Certificate of Indebtedness". That just means that it is your cash and can be used to purchase Treasury Securities or can be transferred back to your bank account at your pleasure, but otherwise Treasury can do what they want with it until you say otherwise and they don't pay any interest on it. It's basically just a convenience.

I need to find out if there is any automatic rollover so that I can keep my money in T-bills without manually re-purchasing them every 4- 13- or 26 weeks. My order says that the "Maturity Payment Destination" is my bank account, but that may simply be because I used the "Purchase Express" feature which by design has fewer options to sort through.

The other big uncertainty is exactly what interest rate I will get on each auction. It's purely supply versus demand, so if there is a huge demand, the yield will be skimpier and if there is slack demand the yield will be fatter. The official Recent Treasury Bill Auction Results shows the most recent 28-day bill issued on Thursday, June 29, 2006 and maturing on Thursday, July 27, 2006 at a "Discount Rate" of 4.775% and an "Investment Rate" of 4.869% and a price per $100 of par value of $99.628611. Let's see... The price per $100 of $99.628611 means that you would get $.0371389 in "interest" on that $99.628611 investment over 28 days or a 4-week return of 0.373%. Divide that by 28 and multiply by 365 and you would be getting a simple annual interest rate of about 4.86%. That's still well short of the Fed funds target interest rate (5.00% befre the announcement last Thursday), but still a little greater than the Fidelity Cash Reserves rate.

For comparision, the discount rate for the 91-day T-bill was 4.955%, which was only slightly less than the Fed funds discount rate before the FOMC announcement, and the discount rate for the 182-day T-bill was 5.090%. I simply do not know if we can expect the T-bill discount rates to suddenly pop up by 0.25% this week or if they will rise only slowly between now and the August FOMC meeting.

I would note that you would need to have a sizeable amount of Treasuries to compound your interest every period. You have four choices: 1) hold at least $100,000 in Treasuries so that even $1 of interest on each $100 par is enough to buy you another $1,000 of bills, 2) bump up your purchases by enough so that the fresh cash added to the interest is enough for a $1,000 increase in purchases, or 3) transfer the interest back to your bank account and then over to a money market account like FPRXX or FPRXX or BDMXX, or 4) don't worry about the fact that you won't immediately be compounding interest on less than $1,000. I don't like the latter, but it is simpler and less of an issue as you build up your nest egg.

I'm particularly attracted by the thought that there are no middlemen (like Fidelity) taking a cut of my returns. Using the TD web site doesn't appear to be any more complicated than using Fidelity's web site.

I'll start with the 4-week T-bills at first since it only takes a month to get out of them, but I may extend to the 3-month or even 6-month T-bills as I accumulate more cash and have less need for the immediate liquidity of a money market mutual fund.

To be clear, I do not know if this TreasuryDirect thing will really work out for me, but it does seem worth a shot.

-- Jack Krupansky