Friday, July 07, 2006

My T-bills have been purchased

My new account at TreasuryDirect did in fact buy $1,000 of 28-day U.S. Treasury T-bills. It shows as $1,000 in my account, which is the "par" value, even though the purchase price was $996.32. My bank checking account has not yet been debited, but I would expect that to happen within a day or two.

The TreasuryDirect web site says that my "yield" is 4.735% and that my "investment/interest rate" is 4.819%, but those numbers don't make a lot of sense accept that Treasury has some magic formulas to calculate them. What I do know is that since my actual "earnings" after 28 days will be $3.68, the difference between the par value and the discounted purchase price, my "return" for the 28-day period is 0.369%, and if you divide than by 28 and multiply by 365 days in a year, you come up with an annual simple interest rate of 4.815%. That's not great, but I don't feel too bad about it.

My next step is to figure out the simple, automatic method of rolling the balance over month to month. I actually did go ahead and schedule a repeating purchase, that will purchase the same amount every month, but I'm not completely sure that the maturing par value will be credited to my bank checking account in time to cover the debit for the next purchase. I suspect it will work fine, but I have to think it through some more. The alternative is to select for the maturing par value to be placed in my zero-percent C of I account at Treasury and select for the new purchases to be paid from the C of I account. That makes sense for large accounts where the monthly interest is enough to buy additional T-bills, but for a smaller account the interest amount will accumulate for quite some time without earning any interest. I'm hoping that my approach will keep only the purchase price in the TD account and the interest will by transferred each month back into my bank checking account. We'll have to see how this works out.

The fact that I didn't go with 3-month or 6-month T-bills probably indicates my own hesitation as to whether the Fed really is already "paused" or will hike againt at least in August. If the Fed really is paused, the higher yield of the longer-duration T-bills would be more attractive, but if the Fed is going to hike even one more time in August, the longer-term debt simply locks in a less-atractive rate, while the shorter-term debt keeps my options open with a maximum lack of liquidity of 28 days.

-- Jack Krupansky


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