These are the current treasury bill rates:
4-WEEK 0.000
13-WEEK 0.010
26-WEEK 0.050
If you bought $1000 in bills, you’d make a cool dime in profit in 13 weeks. If you can invest for 6 months, you will make enough to buy a soda. Well, not a name brand but maybe a Kokka Kola or something.
I was going to ask if people do buy them when rates are low, but I ran across this story from last month that said $29 billion in 3 month t-bills were sold at 0.045.
Who buys those and why?
If you have $20M in cash and low tolerance for risk, where do you put it? In a bank? Banks can fail, and FDIC insurance only covers $250,000. Buy stocks, gold, etc.? They can always lose value. If you want to be absolutely sure your $20M is still around in 13 weeks, T-bills are your best bet.
Actually, I assume those rates are annual interest rates. In that case you would make 2.5¢ after 13 weeks on your first example and a whole quarter after 26 weeks in your second.
But the fact is that they are treating the T-bills as a large mattress. Which makes the whole S&P ratings fatuous. Imagine the company that rated nearly worthless (okay I exaggerate) CDOs as AAA finds T-bills slightly speculative. Clearly those buyers do not agree.
Note that it’s possible to be interested in the currency component of a T-bill even if you’re not interested in the interest rate. For instance, suppose the government of China wants to invest a billion dollars in a security denominated in U.S. dollars to hedge foreign exchange exposure. Obviously, they’re not going to get 1 billion $1 bills FedExed to Beijing; instead they invest in U.S. T-bills (despite the low rate).
Treasury bills have historically been SO stable that in financial calculations, the T-bill rate is called the “risk free rate of return”, or in other words, you have to expect to make more than the risk-free rate of return for the investment to be worthwhile, otherwise you’d just invest in T-bills.
That’s why people invest in them- you’re virtually guaranteed of making the t-bill rate over time. It’s not much, but it’s all but guaranteed, despite whatever political shenanigans S&P are going through.
Isn’t it really the other way around?
The rates are low because people (lots of people) want to buy them. If a smaller number of people were willing to buy them, they would drive the rates up.
Yes, the rates offered are so low because enough people are willing to buy them at that rate. But the OP’s question - “why would anyone be willing to invest in something with such a low rate of return?” - is valid (and has been answered).
Isn’t it also true that T-bills have no fees attached to their purchase? (I’m relying on memory so please correct me if I’m wrong.) Standard funds - hedge funds, mutual funds, index funds, etc. - have handling fees that can range up to several percent. I’m sure that the bigger you are and the more money you invest, the smaller the fee you can find. Even so, If a fund pays 1.5% and charges a fee of 1.25%, then you’re ahead to buy a T-bill at 0.5%.
You guys seem to be imagining a lot of people investing all their money in T-bills. Actually, most of the purchases are by institutions with diversified portfolios, who are looking to keep a percentage in cash equivalents. Treasuries are considered the ultimate safe investment and are also highly liquid.
In addition, there are also institutions, e.g. banks & pension funds, which are required to keep some portion of their capital in very safe and liquid investments. For this portion of the investment money, T-bills are only competing against similar forms of investment.
[Slightly OT: part of the European bank problem that is affecting the global financial community and stock markets these days is derived from the above situation. Many European banks were required by regulators to keep a high percentage of their capital in government debt, which was considered the safest. When some of this government debt came to be viewed as highly risky, it had a significant impact on these banks, which rippled through the rest of the intertwined financial community.]
There were times back in 2008 that investers were so scared they invested in T-bills at NEGATIVE rates. They were willing to put their money in them to get *less *money back later.
Well, probably technically so they’d lose less money on the T-Bills than on other investments, and that they’d know what their losses would be.
IIRC they were buying TIPS at negative rates, so they weren’t technically getting back less money than they put in - just less than the rate of inflation.
Here’s an interesting blog post about recent negative interest rates in Switzerland. As noted above, it’s a matter of (a) desperate demand for high-quality investments that are used to improve the credit-worthiness of an institution’s portfolio and (b) the belief that the swiss franc is a stronger investment than the euro.
No, I think it was just normal bills. Link. But I am not a financial expert, so I can be corrected.
No, it looks like you’re right. My apologies.