Buying Treasury Bills: An Advice

 

People buying Treasury bills (T-bills) through their banks or brokerage houses pay a fee of $30 or more. It's possible to bypass the fee, however, and place the order yourself by submitting what's known as a noncompetitive tender. That means you are willing to pay the prevailing price set at the weekly government auction of T-bills every Monday.

Did you know How Treasury Bills Work?

To understand the bidding process, you need to know how T-bills are priced. That is, they are sold at less than face value, and at maturity they are redeemed at full face value. So while interest is being earned, there is no inter est payment as such.

The interest rate earned by the purchaser usually is expressed in terms of the commonly used discount rate. This rate is based on the face value of the bill. It understates the investor's real return To make a valid comparison with coupon bearing securities, such as corporate bonds. investors need to know the coupon-equivalent yield of the bill

 

This is the yield on the amount they actually invest Interest from T-bills, unlike the interest on bank savings certificates pegged to them, is exempt from state and local income taxes Investors who wish to bid on T-bills should submit their bids to one of the 12 regional Federal Reserve Banks around the country. The Banks have similar but not identical operating policies. Those described below apply to the Federal Reserve Bank of New York, so check with the Bank in your area to see if there are any differences

To be on the safe side, investors should mail their bids early enough to arrive at least one business day before the Monday auction. But people submitting bids in person can do so up until 1:30 p.m. on the day of the auction.

You must either fill out a tender form (provided by the Fed) or send a letter that indicates, among other things, whether you wish to reinvest your money when the T-bill matures.

Even though T-bills are sold at discount, you must pay the full $10,000 face value of the bill at the time you submit your bid. You may pay in cash, with a personal certified check, or with an official bank check drawn on a bank in the New York Federal Reserve District.

Any check must be made out payable to the "Federal Reserve Bank of New York." A check from a third party, payable to you and then endorsed by you over to the Bank, will not be accepted. Nor will a check drawn on a money market mutual fund.

A few days after the auction, the New York Fed will mail you a discount check, representing the difference between the purchase price and the face value of the bill.

What you will receive: An ordinary receipt that links up to a book entry in a government ledger, attesting to ownership of a T-bill.

Treasury Bills as Leverage in Stock Trading

Margin-account investors can take a beating in a volatile market when interest rates are high. A better strategy: Invest in Treasury bills (T-bills) or bonds. Then borrow against the bills (brokerage firms will lend up to 90 cents on the dollar of face value) for money to trade in the stock market.

Several advantages:

• Assured income on the T-bill, no matter what happens to the stocks. Thus, a hedge.

• T-bill income is not taxable on state and local returns.

• T-bills offer instant liquidity. • No margin calls. Timing of trades is totally your own decision.

• Like a passbook loan, it makes credit easier to get as money becomes tighter.

Think in terms of buying and selling securities on a short-term price basis. Use the guaranteed income from the T-bill to neutralize the effects of market volatility.

If you elect to hold a stock, the numbers be gin to go against you if interest rates continue to climb during the holding period. This is because interest on the T-bill is fixed. To avoid this danger, establish an annual rate-of-return goal for every invested dollar. Whenever that goal is reached, take the profit. This gives you the option of sitting out the rest of the year if you don't like market conditions.

Bookkeeping bonus

Collateralize a mar gin account with T-bills is not only the best but also the most convenient and economical way of taking advantage of high interest rates and, at the same time, keeping trading money available. Accounting is easy, since the ac count is debited with interest on a running basis. You see your margin charge every month and know what you can expect in interest at the end of every holding period.

 Please learn How a Professional Investor Handles His Own Money.