Where Do You Keep Your Liquid Wealth—Bank Deposits or T-bills? (2024)

With an inflation rate of 8%, it's important for households and firms to decide in which financial instruments to keep their liquid wealth. Indi­vid­uals and organizations can hold liquid wealth in cash, as money in bank accounts (checking, savings, and time deposits), and in holdings of liquid financial assets, such as U.S. Treasuries.

In a high-inflation economy, there is also a high opportunity cost of holding cash, so consumers prefer to save their money in instruments that pay a positive nominal interest rate. Banks have historically been a safe, liquid place to park wealth, typically offering a range of products—from checking and savings accounts to money market and certificates of deposit (CDs). CDs typically pay a higher rate than checking or savings, but when you deposit money into a CD, you cannot withdraw that money until maturity or else you must pay penalties. CDs are often available at 3-, 6-, and 12-month maturities.1

The U.S. government issues bonds called U.S. Treasury Bills (T-bills). T-bills are short-term assets similar to CDs, but a consumer lends to the U.S. government instead of to a bank. The main difference between T-bills and CDs is that the secondary market for T-bills is one of the most-­liquid financial markets, so it is much easier to exit from a T-bill than from a CD.

With low interest rates, there is very little difference between holding CDs and T-bills because they pay very similar interest rates. For example, in October 2021 the 12-month CD rate was 0.12% while the 12-month T-bill rate was 0.1%.

In the past 6 months, however, interest rates have increased very quickly. Today, the effective federal funds rate is 3.78%, while in October 2021 it was 0.08%. The speed of these increases has taken the economy from a market where rates on bank deposits and T-bills were almost indistinguishable to one in which they are vastly different. The figure compares the interest rates of CDs and T-bills at 3-, 6-, and 12-month maturities.

Where Do You Keep Your Liquid Wealth—Bank Deposits or T-bills? (1)

During the COVID-19 pandemic, the Federal Open Market Committee (FOMC) maintained the federal funds target rate—resulting in an effective rate around 8 basis points, or 0.08%. Many market options for saving money were also at low rates: From April 2020 until December 2021, all three maturities of CDs and T-bills paid less than 0.3%. At the beginning of 2022, the rates that T-bills paid began to lift off. Around this time, inflation was high and the FOMC was signaling that the federal funds rate needed to rise. In March, when the FOMC first raised the target range for the federal funds rate, by 0.25%, the 12-month T-bill rate was already 1.27%. Meanwhile, the 12-month CD rate that banks paid remained at 0.12%.

As in previous work, we define the deposit spread as the difference between the federal funds rate and the deposit rate—in this case for CDs.2 The figure shows that over the past 6 months, the deposit spread rose from near zero to more than 3%. The deposit spread has continued to increase because the FOMC is raising the target range for the federal funds rate much faster than banks are raising the interest they pay on deposits.

Likewise, disparities between the rates paid on T-bills and those paid on CDs have also increased. In November 2022, the federal funds rate was 3.78% while all three maturities of T-bills paid between 4.15% and 4.5%: This may be interpreted as the market anticipating further FOMC rate hikes.

T-bills are more liquid than CDs but have about the same level of safety and maturity, so we would expect CDs to pay a higher rate to compensate for the difference in liquidity. However, this is not the case: In November 2022, a 12-month CD paid a rate of 0.6%, with 3- and 6-month CDs paying even less. At the beginning of 2022, bank deposits paid similar interest rates to T-bills, but they now pay almost 4% less. Thus, bank deposits essentially function as holding cash and can be a bad choice for holding liquid wealth in the current high-rate and high-­inflation environment.

Notes

1 The CD rates presented are for current quotes by institutions and thus represent new rates—not rates on existing deposits. They are for CDs with a minimum of $10,000.

2 Kozlowski, Julian and Jordan-Wood, Samuel. "Liquidity Dries Up." Federal Reserve Bank of St. Louis Economic Synopses, 2022, No. 24; https://doi.org/10.20955/es.2022.24.

© 2022, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Where Do You Keep Your Liquid Wealth—Bank Deposits or T-bills? (2024)

FAQs

What is the liquidity of Treasury bills? ›

A liquidity measure used in the Treasury market is the “liquidity” spread between more and less liquid securities, often calculated as the difference between the yield of an on- the-run security and that of an off-the-run security with similar cash flow characteristics.

Are stocks or Treasury bills more liquid? ›

treasury bills are much more liquid investments (i.e., cash for alternative investments is tied up for shorter periods of time). Because of this high liquidity, the yield rate on treasury bills is normally lower than on longer-term securities.

Why are Treasury bills highly liquid? ›

🤔 Understanding treasury bills

Treasury bills, aka T-bills, are considered highly liquid (quickly and easily convertible to cash) because of their quick maturity dates and low risk (they're backed by the US government).

Which is better Treasury bills or notes? ›

Treasury bills have short-term maturities and pay interest at maturity. Treasury bonds have long maturities and pay interest every 6 months. Treasury notes have mid-range maturities and pay interest every 6 months.

How do you liquidate Treasury bills? ›

You can hold Treasury bills until they mature or sell them before they mature. To sell a bill you hold in TreasuryDirect or Legacy TreasuryDirect, first transfer the bill to a bank, broker, or dealer, then ask the bank, broker, or dealer to sell the bill for you.

How much Treasury bills can I buy? ›

Bills at a Glance
Now issued inElectronic form only
Interest paidWhen the bill matures
Minimum purchase$100
In increments of$100
Maximum purchase$10 million (non-competitive bid) 35% of offering amount (competitive bid) (See Buying a Treasury marketable security for information on types of bids.)
5 more rows

Are Treasury bills a good investment in 2023? ›

Are Treasury Bills a good investment for 2023? US Treasury bills (T-bills) are considered safe and low-risk investments. They are issued by the United States government and backed by its full faith and credit. Investing in T-Bills isn't necessarily a good long-term strategy, but they are good for short-term goals.

Are Treasury bills a good investment now? ›

Treasury bills are a hot investment right now because of recent notable jumps in their yields after a number of rate hikes from the Federal Reserve.

What currency is the most liquid asset? ›

Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances.

Is a treasury bill better than a CD? ›

The return on T-bills tends to have an inverse relationship with inflation and the Federal Reserve benchmark rate. A higher rate set by the Federal Reserve means lower returns on T-bills. By contrast, CDs and high-yield savings accounts tend to give higher returns as the Federal Reserve benchmark rate increases.

Is it better to buy Treasuries or CDs? ›

Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.

How safe are Treasury bills? ›

T-Bills Are a Safe Investment

The federal government has never defaulted on an obligation, and it's universally believed it never will. Investors who hold T-bills can rest assured that they will not lose their investment. T-Bills are considered a zero-risk investment thanks also to Treasury market liquidity.

Which is safer Treasury bills or CDs? ›

T-bills are more liquid than CDs but have about the same level of safety and maturity, so we would expect CDs to pay a higher rate to compensate for the difference in liquidity.

What are the cons of Treasury bills? ›

The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market mutual funds, corporate bonds, or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.

Are Treasury bills 100% safe? ›

Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time.

Can you sell Treasury bills anytime? ›

You can sell a T-Bill before its maturity date without penalty, although you will be charged a commission. (With CDs, you pay a sizeable penalty for early withdrawals.)

Can you withdraw money from Treasury bills? ›

Unlike other investments that may have lock-in periods or penalties for early withdrawal, treasury bills can be easily sold or redeemed at any time.

Can Treasury bills be converted to cash? ›

Both a three-month U.S Treasury bill (purchased 1/15/CY and matures 4/15/CY) and a three-year Treasury Note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when it has three or less months to maturity.

What is the largest treasury bill you can buy? ›

A Treasury bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids.

How much does a 1 year treasury bill cost? ›

1 Year Treasury Rate (I:1YTCMR)

1 Year Treasury Rate is at 5.24%, compared to 5.12% the previous market day and 2.01% last year. This is higher than the long term average of 2.89%.

Can normal people buy Treasury bills? ›

You can buy short-term Treasury bills on TreasuryDirect, the U.S. government's portal for buying U.S. Treasuries. Short-term Treasury bills can also be bought and sold through a bank or broker. If you do not wish to hold your Treasuries until maturity, the only way to sell them is through a bank or broker.

Does Warren Buffett buy Treasury bills? ›

Buffett said his company Berkshire Hathaway will always ensure to have significant cash and funds in US Treasury bills in order to avert any crisis-like situations.

Do banks sell Treasury bills? ›

Individuals, organizations, fiduciaries, and corporate investors may buy Treasury securities through a bank, broker, or dealer. With a bank, broker, or dealer, you may bid for Treasury marketable securities non-competitively or competitively, but not both, for the same auction.

Why would anyone buy Treasury bills? ›

Treasury bills are good investments for individuals looking to make a large purchase in a short timeline, as the money will only be tied-up for at most a year. Although T-bills don't typically earn as much as other securities, or in some cases CDs, they still offer higher returns than traditional savings accounts.

Are T-bills tax free? ›

Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax, but is exempt from all state and local income taxes.

Will T Bill rates go up in 2023? ›

Since the Fed altered its strategy, yields on 3-month U.S. Treasury bills jumped, from 0.01% at the end of 2021 to higher than 5.0% today. More Fed rate hikes are expected in 2023, though Fed officials have indicated those increases will be more modest than what occurred in 2022.

Is a car a liquid asset? ›

In most cases, a car isn't a liquid asset. It may take some time to sell, you may incur costs in converting it to cash, and it probably won't sell for the same amount you put into it. In some cases, it may not sell for even the current market value, especially if you're trying to turn it into cash quickly.

Is a retirement account a liquid asset? ›

Are Retirement Accounts like IRAs and 401(k)s Liquid Assets? Retirement accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s are not really liquid until you've reached age 59 ½. Withdraw funds from your account before then, and you may face taxes and a 10% early withdrawal penalty.

Is jewelry a liquid asset? ›

The common liquid assets are stock, bonds, certificates of deposit, or shares. Liquid assets are different from non-liquid assets, such as property, vehicles, or jewelry, which can take longer to sell and may lose value in the sale. Liquid assets are perceived as being the most basic type of asset available.

Should I keep money in a CD? ›

Investing in CDs can be a good choice for people who want to keep their savings safe and secure. CDs offer FDIC insurance, meaning you can get your money back even if the bank fails. Furthermore, they can provide a predictable interest rate and help diversify a portfolio.

Do Treasuries pay more than CDs? ›

Across the board, the rates for T-bills are higher than those for CDs of comparable maturities. Despite a handful of outliers, the current average rate for a one-year CD is a paltry 1.44%, according to Bankrate, vs. 5% for a one-year T-bill.

What are the best Treasuries to buy? ›

7 Treasury Bond ETFs to Buy While Rates Are High
Treasury ETFExpense Ratio
iShares Treasury Floating Rate Bond ETF (TFLO)0.15%
Invesco Treasury Collateral ETF (CLTL)0.08%
iShares iBonds Dec 2025 Term Treasury ETF (IBTF)0.07%
The US Treasury 10 Year Note ETF (UTEN)0.15%
3 more rows
Mar 23, 2023

Why would you not invest in CDs? ›

Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you may get hit with a penalty fee equal to some or all of the interest earned. Inflation: Inflation is an extended period of rising consumer prices.

Do you pay taxes on Treasury bonds? ›

You owe tax on the interest the bond earned until it was reissued. You are the new owner of a reissued bond. You owe tax on the interest the bond earns after it was reissued.

How long can you keep a treasury bill? ›

Treasury bills have a maturity of one year or less, and they do not pay interest before the expiry of the maturity period. They are sold in auctions at a discount from the par value of the bill. They are offered with maturities of 28 days (one month), 91 days (3 months), 182 days (6 months), and 364 days (one year).

How often do 3 month Treasury bills pay interest? ›

Both bonds and notes pay interest every six months.

What happens to Treasuries when interest rates rise? ›

Fed policy initiatives have a huge effect on the price and the yield of bonds. When the Fed increases the federal funds rate, the price of bonds decrease and their yield increases. The opposite happens when interest rates go down: bond prices go up and the yield decreases.

Which is safer annuity or CD? ›

Bank CDs are considered an extremely safe investment because the FDIC insures them up to $250,000. Although annuities are not insured by the federal government, they're also considered safe because they're insured by the issuing insurance company and, in most cases, also by state guaranty associations.

What is the drawback to CDs vs savings accounts? ›

Drawbacks of a CD

Need to wait for maturity: At its core, a CD requires more patience than a traditional savings account. Once you lock down your cash in a CD, it's there for the term's duration. Penalties for early withdrawal: The entire point of a CD is to keep the money in the bank for a set period of time.

Are Treasuries safer than cash? ›

The number-one reason U.S. Treasuries are considered to be safe investments is that when you buy a Treasury bill, bond, or note, you are guaranteed by the government to receive the face value of your investment, as long as you hold it to the maturity date.

Do Treasury bills have taxes? ›

Key Takeaways. The interest earned from investments in Treasury bills is taxable at the federal level, but is not subject to state and local income taxes.

How often do 2 year Treasury notes pay interest? ›

We sell Treasury Notes for a term of 2, 3, 5, 7, or 10 years. Notes pay a fixed rate of interest every six months until they mature. You can hold a note until it matures or sell it before it matures.

Have Treasury bills ever lost money? ›

The United States government has never defaulted on a debt or missed a payment on a debt. You would have to envision the utter collapse of the government to find a scenario that would involve losing any of the principal invested in a T-bond.

What happens when T Bill matures? ›

When your treasury bill reaches maturity at the end of your term, you'll get your money back—plus interest. And, unlike other savings vehicles like certificates of deposit (CDs), you can sell a treasury bill before it matures.

Are Treasuries highly liquid? ›

Why Liquidity Matters. The U.S. Treasury securities market is the largest and most liquid government securities market in the world.

Why is the US T bill considered free of liquidity risk? ›

T-bills are considered nearly free of default risk because they are fully backed by the U.S. government. The market risk premium is the difference between the expected return on a portfolio minus the risk-free rate.

What is the liquidity of the 20 year treasury bond? ›

The liquidity of the 20-year bond appears similar to that of the 30-year. Average bid-ask spreads are slightly wider, at 1.2 32nds of a point, vs. 1.0 32nds for the 30-year, with some market makers expressing surprise at the tightness of the 20-year spreads given the security's newness.

What is the liquidity of government bonds? ›

If you purchased individual bonds for the income they provide and plan to hold the bonds until maturity, you may not have given much thought to whether you'd be able to sell them if you wanted to or how cost-efficient it is to do so when building a portfolio. This concept is known as liquidity.

What bank assets are most liquid? ›

Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances.

Should I put money in Treasuries? ›

If you're seeking low-risk investments, your first choice should always be U.S. Treasury securities. Backed by the full faith and credit of the U.S. government, Treasurys are the safest investment asset on earth.

Can you buy Treasury bills from a bank? ›

You can buy short-term Treasury bills on TreasuryDirect, the U.S. government's portal for buying U.S. Treasuries. Short-term Treasury bills can also be bought and sold through a bank or broker. If you do not wish to hold your Treasuries until maturity, the only way to sell them is through a bank or broker.

Why is a T-bill a safe investment? ›

A Treasury bill, or T-bill, is a short-term debt obligation backed by the U.S. Treasury Department. It's one of the safest places you can save your cash, as it's backed by the full faith and credit of the U.S. government. T-bills are auctioned off at a discount and then redeemed at maturity for the full amount.

What is the most liquid Treasury bond? ›

The 10-year futures contract is the most liquid contract by a comfortable margin, at 19% of total DV01 volume. The 10- and 5-year OTR bonds are next, with 15% and 10%, respectively, followed by the 30-year futures contract and the 30-year OTR bond with 9.5% and 9.3%, respectively.

What are the most liquid US Treasury bonds? ›

How On-the-Run Treasuries Work. The on-the-run bond or note is the most frequently traded Treasury security of its maturity. Because on-the-run issues are the most liquid, they typically trade at a slight premium and thus yield a little less than their off-the-run counterparts.

What is the difference between treasury and liquidity? ›

Treasury Risk is the risk associated with the management of an enterprise's holdings – ranging from money market instruments through to equities trading. Liquidity and Capital Risk is generally defined as the risk associated with an enterprise's ability to convert an asset or security into cash to prevent a loss.

Is a house liquid asset? ›

Land and real estate investments are considered non-liquid assets because it can take months for a person or company to receive cash from the sale.

Is a savings account a liquid asset? ›

A few examples of liquid assets are: Cash in checking, savings, and money market accounts. Certificates of deposit (A CD may be liquid, depending on its terms and charges.)

How big is the US debt market? ›

In 2021, S&P Global Ratings rated approximately 76% of the $3.0 trillion in addressable debt issued in the U.S. market compared with 85% in 2020. Rated debt issuance by dollar volume in the U.S. increased by 5% from 2020 to 2021 while the number of issues increased by approximately 3%.

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