Is a money market better than T-bills?
Money-market funds might pay a little less, but they are the rare mutual fund designed so that their share price almost never changes. And T-bills' value can fluctuate unless you hold them to maturity. Treasury securities are essentially interest-bearing IOUs issued by the U.S. government to raise funds.
The Potential Downside
Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.
Compared with Treasury notes and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.
Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees.
A higher rate set by the Federal Reserve means lower returns on T-bills. By contrast, CDs and high-yield savings accounts tend to give higher returns as the Federal Reserve benchmark rate increases.
"Long-term Treasury bonds may have no default risk, but they have liquidity risk and interest rate risk — when selling the bond prior to maturity, the sales price is sometimes uncertain, especially in times of financial market stress," it said.
Why Buffett Loves Treasury Bills. In 2022, Buffett's Berkshire Hathaway held a whopping $126 billion in U.S. Treasury bills. Buffett reportedly prefers T-bills to other options because he never wants to worry about whether or not Berkshire's pile of cash is safely invested.
If you live in a state with income taxes, and rates are similar for CDs and T-bills, then it makes sense to go with a T-bill. 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.
The No. 1 advantage that T-bills offer relative to other investments is the fact that there's virtually zero risk that you'll lose your initial investment. The government backs these securities so there's much less need to worry that you could lose money in the deal compared to other investments.
When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
What is bad about a money market account?
Money market accounts can come with fees, including monthly maintenance fees, excess withdrawal fees, overdraft fees and more, that can eat into your earnings. Some banks may allow you to waive monthly maintenance fees by meeting certain criteria, but that's not always the case. Variable interest rates.
One of the biggest disadvantages of a money market account is that some financial institutions may put a cap on how many convenient withdrawals you can make each month. The Federal Reserve once limited consumers to six per month, though this rule was phased out in 2020.
If you're saving for something you'll need the money for in less than three to five years, saving in a money market fund may make sense for you. Money market funds are ideal for short-term saving because they invest in highly liquid securities with the objective of capital preservation and income.
Money-market funds might pay a little less, but they are the rare mutual fund designed so that their share price almost never changes. And T-bills' value can fluctuate unless you hold them to maturity. Treasury securities are essentially interest-bearing IOUs issued by the U.S. government to raise funds.
When you buy T-bills through your bank, it may charge you additional fees and expenses such as sales commissions or transaction charges. These extra costs can add up over time and eat into your returns on your investment.
Key Takeaways
Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes.
Unlike a debt-limit default, a shutdown does not affect the government's ability to pay its debt to bondholders and therefore does not have a direct impact on the government's borrowing costs or creditworthiness.
U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt. Like CDs, Treasury securities typically pay interest at higher rates than savings accounts do, although it depends on the security's duration.
Inflation. The price of T-Bills can also be affected by the prevailing rate of inflation as inflation eats away at the real purchasing power of the T-Bill.
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.
Where does Buffett park his cash?
First, don't think that Buffett literally has $147 billion or so of Berkshire's money in cash. Instead, Berkshire primarily parks its money in U.S. Treasury bonds.
3 Year Treasury Rate | 4.33% |
---|---|
30-10 Year Treasury Yield Spread | 0.15% |
5 Year Treasury Rate | 4.15% |
6 Month Treasury Rate | 5.37% |
7 Year Treasury Rate | 4.16% |
1 Year Treasury Rate is at 5.00%, compared to 4.95% the previous market day and 4.30% last year.
If you're looking for a short-term investment with low risk, Treasury bills are a great choice. However, if you're looking for a longer-term investment that yields semiannual income with a consistent interest rate, buying Treasury bonds is likely the better choice.
Treasury Bills, the 'safest investment' on earth, are quite profitable right now - but don't wait too long. Treasury Bills could be a great way to make inflation work for you but don't wait too long.
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