Treasury vs Funds or Online Bank

[joesxm3]

For a long while it seemed that my online bank account was paying a much higher interest rate than the money market funds at my brokerage account. But now the situation seems to be changing.

I took a look tonight and my online bank is paying 2.35% and the short term government funds around 2.5% and a regular money market 2.7%.

I have never bought a government bond directly other than I-Bonds, but I looked at a treasury department web site that seems to show rates ranging from 1 month 3.30%, 6 month 4.31% and 1 year 4.50%.

I had thought of the online bank account as offering flexibility, but since I opened it several years ago I just park the money there. In my brokerage I potentially would deploy some cash into equities, but there is still enough excess to just sit there.

A couple years ago I spoke to the bond department at the brokerage and they told me that the fees associated with buying the treasury bonds would cancel out the difference in yield compared to the funds. I think they may have been lying to me.

So, it looks like I could get 1.5% to 2% more by buying some treasuries.

Do you think it would make sense to buy the treasuries?

If so, would it be best to buy them at the next auction rather than from the market?

 

[joesxm3]

Oh, and it just occurred to me that some of the funds I have as core brokerage funds are government funds. Should not these and the treasuries be exempt from state income tax?

I had so little interest before that I probably missed it in Turbo Tax, but now it would matter when comparing the treasury yield to the online bank or normal money market fund, no?

 

[audreyh1]

These things go in cycles. When the Fed is actively raising the Fed Funds Rate treasuries seem to respond most quickly, then money market funds which also catch up quickly and the bank high yield savings accounts which follow more slowly.

So it pays to be flexible.

Many of us have been buying t-bills this year as rates have gone up, staying short in duration since additional raises have been expected.

Several discount brokerages offer no fee treasury purchases at auction. It’s quite straightforward.

Plenty of discussion in the thread devoted to treasuries. https://www.early-retirement.org/forums/f28/treasury-bills-notes-and-bonds-discussion-115186.html

 

[JoeWras]

A couple years ago I spoke to the bond department at the brokerage and they told me that the fees associated with buying the treasury bonds would cancel out the difference in yield compared to the funds. I think they may have been lying to me.

Full service brokerage a few years ago? They probably weren't lying to you in the context of their cost structure. Some of these brokerages charge per bond ($1000), even government bond. With rates below 1% a few years ago, it was true.

As audrey1 says, right now we are in a unique time in the cycle where T-Bills make a lot of sense. Vanguard, Schwab and Fidelity charge $0 for government bonds if you buy via their websites. If you need assistance (call on the phone), they may charge you, unless you have certain account balances. Buying online from these sites is easy once you learn to navigate. There are other threads here explaining how to do that.

I'm way pleased that I got in on the 26 week auction last Tuesday that paid almost 4.2%.