Investing in T-bills (Part 12)

As mentioned in the fifth-to-last paragraph of Part 8, if trading options with a lot of free cash in the account then one really must invest that cash in T-bills (or some comparable bond position).

My goal with T-bill investment is to earn a relatively high interest rate as discussed in the second paragraph of Part 2. I do not claim this to be optimized or any sort of “best” approach. It makes sense to me, it fits my risk tolerance, and it accomplishes the goal pretty well. The process is a mechanical one that—as mentioned in the fourth paragraph of Part 2—does require a minimal time commitment (usually up to 10 minutes per week).

See Part 1 for a refresher on T-bills.

I allocate about 90% of my free cash to a bond ladder with 6-10 tranches. Every Tuesday, I use my brokerage platform (secondary market) to filter for Treasurys up to one year to maturity, to sort by yield-to-maturity (YTM), and to find highest YTM with shortest maturity date. I generally target maturities 6-10 weeks out and see YTM proportional to [weeks to] maturity. If I see a higher yield for a much shorter maturity date, then I pounce (it may not be the good deal it seems; I don’t yet know what mitigating factors play into this phenomenon). This may result in multiple tranches maturing on the same day that I can later smooth out by purchasing two tranches maturing one week apart on the same day.

Once I have a CUSIP number for the desired T-bill, I call the brokerage to place the order. Prices quoted over the phone are sometimes [slightly] lower, which means a higher YTM. No additional fee is assessed for placing the order by phone and when I call earlier in the day, I usually get connected within 2-3 minutes.

I present one example of a recently-purchased T-bill for those who may want to do the same to ensure accuracy or investment understanding. On Feb 27, 2024, I purchased a T-bill for $99.202 maturing on Apr 23, 2024, and paying 5.355% YTM. Yield is an annualized number that requires division by fractional holding period (in this case 56 days). Also, a 10X price multiplier is always involved. The calculation is:

100% * (1000.00 – (99.202 * 10)) / (1000 * (56 / 365)) = 5.201%

This is not an exact match but in the ballpark. A fixed-income representative recently told me T-bill YTM calculations factor in TVM. I don’t know exactly how the fudge factor works, but approximate is all I need (and far better than 0.35% or 0.57%).

I will illustrate a T-bill with coupon next time.