The shorter-term Treasury bill only lasts a month and offers a rate of 2.6%, according to data from Bloomberg. Three-month bills pay 3.2% and one-year bills a generous 4.1%. Barely a year ago, it was 0.04% on a one-month Treasury bill, 0.02% on a three-month and 0.07% on a year.
Overall, Treasury bond yields are likely to react more quickly to Federal Reserve rate increases compared to online savings accounts or CDs.
Notably, the yield of a 1-year Treasury bill is higher than that of a 10-year Treasury bill, which is 3.9%. This means that investors receive more interest for locking up their money for a much shorter period.
Remember that treasury bills work differently than traditional bonds with longer maturities that pay interest semi-annually. With treasury bills, an investor receives an initial discount on the face value of the note, then receives the full bill amount when it matures. The difference between what you paid initially and what you get at the end of the term is considered interest.
For example, if a one-year treasury bill has a rate of 4%, that means if you were to buy a $1,000 note, you would pay $960 up front and then receive $1,000 at the end. end of the year. The $40 is interest. that you receive for lending money to the US government.
A side benefit of treasury bills is that you don’t have to pay state and local income tax on the interest you earn. If you’re a high-income taxpayer in a high-tax state like New York or California, this may be particularly attractive.
For investors worried about not being able to access their money immediately like they can with a savings account, David Enna of TipsWatch.com offers a helpful strategy. He suggests timing and staggering purchases of 13-week and 26-week Treasury bills on TreasuryDirect.gov. This way, you can benefit from rising rates, while still having access to your money within four weeks.
It might seem like little comfort when 30-year mortgage rates are above 6% and credit card rates are close to 17%, but the trade-off with the Federal Reserve rate hike is that you can finally get a payment a little higher to store money.
While traditional banks are still offering interest rates of 0.01% on cash savings, online banks currently average almost 2% and are expected to soon exceed 3%. For those who want to lock in their money for 12 months, rates on one-year certificates of deposit are also attractive, with an average yield of 2.86%, according to DepositAccounts.com.
But short-term Treasuries currently offer even better rates, with more flexibility. Of course, yields will only climb so long, whether for Treasuries or any other cash investment. Once it looks like inflation has plateaued and the Fed starts easing rates, it’s time to be a little less boring. Until then, might as well maximize what your money can do for you.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
More stories like this are available at bloomberg.com/opinion