Fed's interest-rate hikes make T-bills an attractive, safer investment (2024)

FAQs

Fed's interest-rate hikes make T-bills an attractive, safer investment? ›

One benefit of the Fed's interest-rate hikes aimed at wresting control over inflation is that savers looking for a safe investment for a year or less can now get the best yields in ages from Treasury bills, or T-bills.

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

Rate hikes trickle down to affect yields on T-bills and other money market securities. Traders anticipate Fed moves well in advance. Economic Conditions - Rates typically rise during economic expansions as inflation picks up, while recessions see falling rates.

Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.

T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market. T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.

T-bills are short-term government securities issued by the US Department of the Treasury. They are considered one of the safest investments available due to their backing by the US government.

Differences between investing in CDs and T-bills

The amount you save on taxes will likely result in a higher payout from a T-bill than a CD. Another benefit of T-bills is their liquidity. You can buy and sell them on a secondary market.

More from Personal Finance:

As a rule of thumb, the longer a bond's duration, the more likely its price will decline when interest rates rise. But when interest rates decline, T-bills won't participate in that market value increase, Watson said.

When the Fed increases the federal funds rate, the price of existing fixed-rate bonds decreases and the yields on new fixed-rate bonds increases. The opposite happens when interest rates go down: existing fixed-rate bond prices go up and new fixed-rate bond yields decline.

The Bottom Line. Longer-term Treasury bond yields move in the direction of short-term rates, but the spread between them tends to shrink as rates rise because longer-term bonds are more sensitive to expectations of a future slowing in growth and inflation brought about by the higher short-term rates.

Can I lose money on T-bills? ›

There is virtually zero risk that you will lose principal by investing in T-bonds. There is a risk that you could have earned better money elsewhere.

Inflation. This is the rate at which the price of goods and services in the economy rises and is perhaps the greatest risk to T-bill investors. Rising inflation erodes the value of interest payments. Inflation can exceed the investment return and eat into the principal's value.

Treasury bonds—also called T-bonds—are long-term debt obligations that mature in terms of 20 or 30 years. They're essentially the opposite of T-bills as they're the longest-term and typically the highest-yielding among T-bills, T-bonds, and Treasury notes.

Treasury securities are considered the safest and most liquid investment. This makes Treasuries the perfect collateral for borrowing money.

The single biggest advantage of purchasing T-bills is that they are more or less free from market risk. * Because they are backed by the US government, the default risk for these investments is close to zero.

Federal bonds or US Treasury bonds are issued by the Federal Reserve System (made up of the central bank and monetary authority of the United States.) Investors favor Treasury bonds during a recession because they're considered to be a safe investment.

It's no secret that Warren Buffett, the billionaire CEO of Berkshire Hathaway, loves treasury bills, also known as T-bills. While he could invest Berkshire Hathaway's massive cash hoard of over $100 billion in nearly anything, for the time being, he's sticking with T-bills.

To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.