The Fed recently announced the restart of permanent open market operations or QE4, but amusingly said not to call it QE (quantitative easing). There is a question as to exactly what securities the Fed will be purchasing, but current speculation revolves around Treasury Bills to start. Whatever the case may be, the Fed will begin to expand its balance sheet again after a short stint of reducing it followed by leveling. What does this mean? For starters, it means the Fed is concerned about liquidity conditions in the market. “Liquidity” for our purpose means selling an asset for available short term cash without substantively affecting its price. In this case, the assets are US Treasury bills, notes, and bonds. When large banks are starved for cash, they are reluctant to buy other assets such as US Treasurys. Enter the Fed as the buyer of last resort, an entity that waves its magic wand to create digital ones and zeros to add to its balance sheet. It is kind of like a game of three-card Monte between the US Treasury, large banks, and the Fed.
Look for banks to get very stingy about the interest it pays to its customers. Of course, this is nothing new. One way banks make money is by “net interest margin”, where they lend out money at a higher interest then they pay on deposits. Below are examples of savings and CD rates for a large bank who will not be named.
The savings rates are self-explanatory and laughable. I mean, 0.08% IF you have a relationship (other accounts or loans) on $100,000-$249,999? LOL. CD’s (certificates of deposit) are equally as miserable if not more so. Lock up your money for 3-5 months and we will give you a whopping 0.02% interest IF you have a relationship. A CD at 9-11 months is where things get interesting with an offered rate of 1.75% for an amount between $10,000-$99,999. Sounds great, right? Wrong, which brings us to the point of this post. Why invest with banks when you can invest directly with the Treasury at much better terms? For the moment I am ignoring “online” banks and credit unions that offer special promotional rates on small balances up to 10-15K (Beware of the fine print in such cases, AND the ability to get your money back in a liquidity crunch). What I am referring to is directly investing in US Treasury Bills, Notes, or Bonds via http://www.treasurydirect.gov.
Using the example of the 9-11 month CD at 1.73%, you can get a similar rate by investing in a 1 month T-bill!! Meaning you only have to tie up your money for 1 month instead of 9 months to get the same return. Additionally, you get the ultimate safety of investing directly in US securities, bypassing banks, and you get the buy the exact same thing the Fed will buy before the Fed buys it.
Investing directly with the Treasury is quite simple and much less intimidating than one might think. First, set up an account profile and link a bank account. Then, click on “Buy Direct”.
You will then come to a screen with options in which you can invest. Treasurys, Savings bonds, and a Zero-Percent Certificate of Indebtedness (basically a checking account with the Treasury that pays no interest). In this case, we are selecting Treasury Bills which are short term securities with a term of 1 year or less.
I will not include all of the remaining screens, but from there you will be shown a list of upcoming auctions when you can buy, and confirm the amount of purchase. There is also an option to reinvest repeatedly after the term expires. For example, you can re-invest in 1-month bills automatically for 6 months or longer if you so desire.
The benefits of using Treasury Direct are numerous:
- Bypass banks to get better rates and terms
- Ultimate safety of the US Treasury
- A zero-interest C of I option (will become very, very valuable if and when US banks start charging customers interest like in the EU)
- Invest alongside the biggest financial institutions in the world
Comment or email with questions. Thank you and have a great day!