Monday, June 8, 2009

T-bills can be a good short-term investment

Editor's note: on Mondays, we post a question and answer. We'd love to answer your questions. Post your questions in the comments section or e-mail them to robynsekula@sbcglobal.net.

QUESTION:
I often hear reporters give T-bill rates on the nightly news. What are T-bills, and are they a good investment?

ANSWER: Treasury Bills are short term-bonds issued by the United States Treasury. Maturities are one year or less, and initial rates are determined by an auction system. There is a vibrant secondary market for these short-term bonds, so it is easy to buy or sell them before maturity. Interestingly, they do not actually pay interest because the original buyer gets a discount from the maturity face value. That discount might rise or fall until the holder at maturity collects the entire face value.

What's the purpose? These are highly-secure short-term bonds. A very safe place to put money for a brief period. Sort of like a money market mutual fund except it's a single bond instead of a portfolio. (Many money market mutual funds are comprised entirely of Treasury Bills or other government bonds nearing maturity, although others also buy corporate bonds and commercial paper.)

Why do business reporters talk about T-Bill rates? It's a reliable indicator of what short-term interest rates are doing. Since T-Bill rates are set by auction, they reflect the "smart money" thinking about interest rates and the economy. Banks, large corporations, and mutual funds heavily invest in T-Bills with idle cash. Other interest rates, from bank accounts to money market funds to short-term loans, reflect the level and direction of rates. In brief, T-Bill rates reflect the safest place to park short-term money. It's an important benchmark for other economic factors in the economy.

If you have a big pile of money you might need in the next 6-9 months, T-Bills could be the perfect investment for you. simpler way for individual investors would be to use a money market mutual fund which offers similar returns with more convenience.

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