Unlock the Power of T-Bills: Your Guide to Safe and Smart Cash Management

Treasury bills (T-Bills) are short-term debt securities issued by the U.S. Treasury and play a critical role as cash management tools in portfolios. In today's dynamic financial landscape, safeguarding your cash while maximizing its potential is more crucial than ever. 

This guide dives into the world of T-Bills, revealing how these securities can serve as a cornerstone of your financial strategy. Whether you're looking to shield large cash balances from market volatility or optimize your after-tax yield, understanding T-Bills is your first step towards smarter cash management.

In this piece, we will discuss:

• What T-Bills are, and what makes them special.
• How T-Bills can be purchased directly or through mutual funds.
• How investors can use T-Bills most effectively.

T-Bills Unpacked: What Are They? ‍

Let's dive into the core characteristics of Treasury Bills and understand their fundamental role in both government finance and investor portfolios.

• Short-term Powerhouses: Treasury bills (T-Bills) are short-term debt securities issued by the U.S. Treasury with maturities between 1 month and 1 year.  
• Government-backed Guarantee: They are backed by the full faith and credit of the United States government. 
• Discounted for Simplicity: T-Bills are sold at a discount to their face or maturity value.  The discount rate and the time to maturity determine the yield an investor earns on a T-Bill.
• Highly Liquid Assets: Enjoy the flexibility of easily buying and selling T-Bills whenever bond markets are open.
• Regular Auction Opportunities: The Treasury regularly auctions various maturities of T-Bills throughout the month, providing frequent investment opportunities. 

Beyond the Basics: Why Treasuring Bills Stand Out in Your Portfolio ‍

There are unique attributes that elevate T-Bills beyond standard cash management tools, making them a truly special asset for you. 

• A Risk-Free Asset: T-Bills serve a fundamental role as a risk-free asset in the U.S. financial system, given their short-term nature and government backing.
• Superior to FDIC limits: While FDIC insurance is limited to $250,000 per depositor, T-bills offer the same “full faith and credit” backing without these limits, making them ideal for larger cash holdings. 
• Simplified Large Cash Management: For large cash deposits, an investor can buy a T-bill in a single brokerage account instead of dealing with multiple bank accounts to achieve the same level of insurance.
• Competitive, Market-Driven Yields: T-Bill yields closely follow the short-term Federal Funds rate set by the Federal Reserve.  As a result, they offer you a very competitive yield.
• Significant Tax Advantages: Another feature of T-bills (and all Treasury debt securities) is that their interest is federally taxable but exempt from state and local taxes.  For taxable investors in high-tax states such as California or New York, this can meaningfully improve the after-tax yield on T-Bills.
• Direct Ownership for Full Tax Benefit: Note that to get the state and local tax exemption, you must buy Treasury securities directly or own mutual funds that own Treasury securities.  Funds that own Treasury-backed repurchase agreements do not qualify for this tax treatment.

T Bills: Your Options for Smart Investment‍

Ready to add T-Bills to your portfolio? Here’s a breakdown of the various ways you can acquire these beneficial securities. 

• Through Brokerage and Custodian Firms: You and your advisor can easily buy T-Bills via brokerage firms, including the custodians our firm uses, such as Schwab and Fidelity.
• Through Mutual Funds and ETFS: You can buy mutual funds that own T-Bills, such as money market mutual funds (MMFs) or exchange-traded funds (ETFs) that own T-Bills.
• With a Separately Managed Account (SMA): For larger portfolios with diverse maturity needs, a Separately Managed Account (SMA) offers a tailored approach to T-Bill investment.
• Directly from TreasuryDirect.gov: Self-directed investors who don’t want to use a brokerage account can buy Treasury securities directly from the U.S. Treasury at TreasuryDirect.gov.

Strategic T-Bill Use: Maximizing Safety and Yield‍

Understanding T-Bills is just the beginning. Now, let’s explore when and how you can most effectively use T-Bills within your financial strategy. 

• For Large Cash Balances: T-Bill portfolios work very well for clients with large cash balances who want to maximize their yield and safety.  Whether an investor purchases T-Bills directly, uses a mutual fund, or purchases them in an SMA is a decision to discuss with your advisor.
• Flexible Maturity for Financial Planning: T-Bills offer investors considerable flexibility in their maturity dates. For example, if a client has sold a business and has a large tax bill due the following April, a T-Bill can be purchased that matures shortly before April 15^th to lock in the taxes due and maximize the yield on that future tax payment.
• Essential During Crises: During financial crises, T-Bill portfolios become particularly important.   During the Global Financial Crisis in 2008 and the banking crisis of 2022, which culminated in the bankruptcies of Silicon Valley Bank, Signature Bank, and First Republic Bank, investors were reminded that not all their cash was safe.  Owners of T-Bills did not have to worry about the safety of their cash.  
• Prioritizing Safety Over Marginal Gains: In good times, you may be tempted to reach for small amounts of additional yield on your cash portfolios. In my experience, cash is not the place in a portfolio to take risks for a small amount of additional income. By keeping your cash in Treasuries, even when yields are low, you can sleep well and preserve the flexibility to invest in opportunities that arise during financial crises.

To fully leverage the power of T-Bills for your financial strategy, I recommend speaking with an expert. Reach out to your Farther advisor today to discover how our firm uses Treasury Bills and funds to keep our clients’ cash safe and maximize their yield, as well as how we utilize them for more customized purposes, such as managing the timing of tax payments. If you aren’t currently working with a Farther advisor, contact us, and we can introduce you to one.  Don’t leave your cash’s safety and potential to chance-take the proactive step and consult with your advisor now to secure your financial future.

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