Treasury bills are still paying above 5%. Here’s what to know before buying

As interest rates reach a more than two-decade high, Treasury bill yields remain well above 5%, as of July 27, providing a competitive option for cash.

With terms ranging from one month to one year, Treasury bills, known as T-bills, are still paying more than long-term Treasurys amid Fed policy uncertainty.

T-bill yields have soared after a series of interest rate hikes from the Federal Reserve, competing with choices like Series I bonds, high-yield savings, certificates of deposit and money market funds.

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But there is not a direct rate comparison with other products because T-bills are typically sold at a discount, with the full value received at maturity, explained Jeremy Keil, a certified financial planner with Keil Financial Partners in Milwaukee.

For example, let’s say you purchase $1,000 worth of 1-year T-bills at a 4% discount, with a $960 purchase price. To calculate your coupon rate (4.16%), you take your $1,000 maturity and subtract the $960 purchase price before dividing the difference by $960.   

Fortunately, you’ll see the “true yield” or “bank equivalent yield” when buying T-bills through TreasuryDirect, a website managed by the U.S. Department of the Treasury, or your brokerage account, Keil said.

If you already have a TreasuryDirect account — say, because you’ve purchased Series I bonds — it’s relatively easy to buy T-bills, according to Keil, who detailed the process on his website.

After logging into your account, you can pick T-bills based on term and auction date, which determines the discount rate for each issue.

“You don’t really know truly what the rate is going to be until the auction hits,” Keil said. The process involves institutions bidding against one another, with no action required from everyday investors. 

After the auction, “you get the exact same rate as the Goldman Sachs of the world,” with TreasuryDirect issuing T-bills a few days later, he said.

There is one downside, however. If you want to sell T-bills before maturity, you must hold the asset in TreasuryDirect for at least 45 days before transferring it to your brokerage account. There are more details about that process here.

One way to avoid liquidity issues is by purchasing T-bills through your brokerage account, rather than using TreasuryDirect.

Keil said the “biggest benefit” of using a brokerage account is instant access to T-bills and immediately knowing your yield to maturity. The trade-off is you’ll probably give up around 0.1% yield or lower, he said.

George Gagliardi, a CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts, also suggests buying T-bills outside of TreasuryDirect to avoid liquidity issues.

For example, there are low-fee exchange-traded funds — available through brokerage accounts — that allow investors to buy and sell T-bills before the term ends, he said.

“The fees pose a small drag on the interest,” Gagliardi said, but the ease of purchase and ability to sell before maturity “may override the small penalty in interest rates” for many investors.