Investors Snap Up T-Bills at Record Pace

No broker would ever tout Treasury bills as a way to get rich quick, but these days the investment is turning more of a profit than you'd expect.

Once considered just a flight to safety, T-bills were mostly used to park assets during times of market turbulence. But the Federal Reserve's campaign of interest rate hikes has handed Treasury bill holders with their highest profits since 2001.

The Treasury Department, which sells the securities either directly to investors or to brokerage houses, reports that the amount of money being sunk into T-bills by retail, or individual, investors has soared since the Fed began its cycle.

In January 2004, for example, there were some $908.5 million of 26-week and $1.46 billion of 13-week Treasury bills held by retail investors. That amount soared to $1.65 billion and $1.94 billion, respectively, this week.

"It used to be investors buying T-bills because they thought Armageddon was coming," said Brian Carlin, head of fixed income trading at JPMorgan Chase & Co.'s private bank.

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"There's now a new group of people that are looking at it that before were marginal buyers," he said. "T-bills have been helpful in maintaining clients wealth during rocky parts of the market, and are now showing better returns than most everything else in fixed income."

T-bills are seen as one of the safest U.S. investments because they are backed by the government, and are considered to be so liquid that some Wall Street traders use the word "cash" to describe them. Concerns about a weakening dollar and increased market volatility have eroded long-term Treasury bonds' reputation as being a safe haven, but interest in short-term T-bills remains robust.

Returns on short-term T-bills have improved significantly since the Fed began raising interest rates two years ago. In fact, returns have even come close to eclipsing those on 30-year bonds.

Each increase in interest rates acts almost like a payday for T-bill holders. And, Carlin says until the Fed breaks from its 16 straight rate hikes, trading in the securities will remain robust.

The Treasury auctioned some $15 billion in new three-month bills Monday at a discount rate of 4.905 percent, up from 4.830 percent last week. Another $14 billion in six-month bills was auctioned at a discount rate of 5.11 percent, up from 5.055 percent last week.

The three-month rate reached its highest level since Feb. 5, 2001, while the six-month rate was the highest since Jan. 2, 2001.

Investors might get a better glimpse at when the Fed might hold interest rates steady after its meeting this week. Their decision is scheduled to be announced Thursday.

"The amount of money allocated to cash and cash alternatives is certainly at a high," Carlin said. "As long as there's a question about what the Fed will do, risk aversion is going to be pretty big across the board, and a decent amount of cash will remain on the sidelines."

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