Ask Money

Treasury Direct

Chris Farrell Feb 1, 2008

Question: I am rather new investor, and am interested in buying the T-Bills from Treasury Direct website. I am particularly interested in the short term T-Bills which mature in 4-6 weeks. The question I have is about the bidding process – should I opt for the Competitive Bid or the Non-Competitive bid, and which one should be used for what kind of situation. I plan to start by investing the minimum amount required i.e., 1000 USD. I have too much exposure in Stocks, so I want to park 2/3’rds of my wealth into non-equity instruments like T-Bills, TIPS, CD’s, Real-Estate etc. Raveen

Answer: Buying U.S. government securities directly from the Treasury is a terrific deal for individual investors like you. It’s easy to set up an account by going to www.treasurydirect.gov. It’s simple to buy securities, and you cut out the costs of paying a middleman. However, since it’s a bit complicated to sell the securities, Treasury Direct works best for buy-and-hold investors.

There is no shortage of bills and bonds to purchase. The federal government has a voracious appetite for cash. The government sells Treasury bills at auction every week with maturities of 4 weeks, 13 weeks, and 26 weeks. The auction schedule for longer-term notes (3, 5, and 10 year maturities), bonds (30-year maturity), and Treasury inflation-protected securities (5,10, and 20 year maturities) is weekly, monthly, quarterly, or bi-annual, depending on the security.

What you want to do is make a “noncompetitive” bid. The interest rate on the T-bill is determined at auction by all the “competitive” bids made by financial institutions, investment banks, pension funds, hedge funds and the like from around the world. The government established the noncompetitive bid category for individuals and small institutions. The noncompetitive bidders automatically get the rate set by all the competitive bidding activity by the giants. Individual investors who make noncompetitive bids are guaranteed to get the Treasury bill they want in the amount they want.

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