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Tuesday, March 21, 2023

Attention investors: What are T-bills, how much do they yield and how to buy them?

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Since the US Federal Reserve began his fight against inflation, the bond rates They don’t stop going up. After touching 5% these low-risk papers are preferred by the market.

What are T-bills?

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They are short-term US government bills (treasurie bills) backed by the Treasury with maturities of one year or less.

Long-term government instruments are called Treasury Notes (maturity two to 10 years) and Treasury Bonds (maturity 10 to 30 years) and they pay interest twice a year, unlike T-Bills that pay only at the end of the term.

Like the rest of the bonds, they constitute one of the most powerful tools of the government to regulate the amount of money in the economy (when it buys bonds it injects dollars, when it sells it rescues dollars from the economy).

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They are fully backed by the US government and are therefore considered virtually risk free, ideal for conservative investors. In finance it is considered as the risk-free asset.

They are generally held to maturity, but as they have a fluid and highly liquid market, they can be sold at any time (charging interest earned from purchase to sale).

How much do they yield?

Currently, the rate curve shows a peak of 5.25% in the 6-month tranche and then gradually falls to 5% in two years and 4.3% in 5 years. This means that the market discounts high rates in the short term by the Fed, which is trying to lower inflation. And they believe him. They believe that the monetary entity will be successful and inflation will drop, so that little by little the rates of their titles will go down.

In short, they see that the inflation problem is in the short term and that since the Fed is taking care of it, it will be resolved over time.

The best known are discount papers, which means that at maturity they will be worth USD 100, no matter what happens with the markets. The discount is the ratio between the purchase value and the value at maturity. Therefore, the return on investment is known in advance. For example, the one-year bill is quoted at USD 95.01. At expiration we know it will be worth $100. Therefore, the yield for the period (discount) is 5.25%.

As the following table shows (we add bonds to have a more global picture), a 6-month bill yields 5.29%, while a one-year bill yields 5.25%. We recommend positioning yourself in this section.

How do you buy the T-bills)

The US Treasury holds weekly auctions where participants offer the desired quantity and rate/price (this is what is called the primary market). For the local investor, it is easier to buy them in the secondary market. The investor must have an account abroad or one with a local broker that can be an intermediary.

Which is the minimum?

They can be purchased in the secondary market with a minimum of USD 100.

What are the costs?

They depend on the broker and the term chosen. They generally range from 0.1 to 1%.

financial adviser

Source: Ambito

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