Government Issued T-Bills & Munis
Government T-Bills & Munis
Treasury Bills (T-bills) provide a way for the United States government to fund projects by raising money from the general public. The simplicity of T-bills is attractive to investors, who purchase the securities at a price that is less than their face value (par value) and receive a payment from the government for the full value of the bills upon maturity. T-bill securities have a short-term maturity and are issued to mature at three-month, six-month, and one-year maturities ("Investopedia," 2015). A primary distinction of T-bills from, say, coupon bonds is when the interest is paid. T-bills pay interest upon maturity and coupon bonds pay interest semi-annually ("Investopedia," 2015).
As a money market instrument, T-bills are quite popular in large part because individual investors can afford them, and because neither local nor state taxes are levied on T-bills. While institutional investors commit very large sums to their investments, individual investors can choose from T-bill denominations as low as $1,000. Typical T-bill denominations are $5,000, 10,000, $25,000, $50,000, $100,000, and $1 million ("Investopedia," 2015).
Globally, treasury securities (T-bills and the like) are considered to be risk-free investments, topping the list of safe investments, since they are backed by the government that issued the treasuries ("Investopedia," 2015). But this safety comes with a price: returns are low because the investment risk is low, and investors who cash out before the maturity of the securities may not receive all the money back that they invested when they purchased the bills ("Investopedia," 2015).
Treasury bills, notes, and bonds are all issued to investors at auction through a competitive bidding process. In order to purchase a T-bill, an investor must submit a competitive or non-competitive bid for the securities ("Investopedia," 2015). For bids that are submitted non-competitively, the investor...
The process of competitive bidding truly is a bid, in that, investors specify the return they are seeking, and learn if they will receive any securities at all, or if they will receive a portion of their bid ("Investopedia," 2015). The determining factor is whether or not the return specified is considered to be too high to truly be competitive ("Investopedia," 2015). A too high bid can put an investor out of the auction action.
A municipal bond is issued to finance large capital expenditures, such as highway or bridge construction and to build schools. A municipal bond provides tax benefits in that most "munies" are exempt from federal taxes, and are also exempt from most local and state taxes, particularly when the investor resides in the state that has issued the municipal bond. As a debt security, municipal bounds are favored by investors in high income tax brackets, fundamentally because of their tax benefits and the low risk of investment.
The information provided up to this point paints a rosy picture for treasury bills. However remote -- a consideration that is viewed as more probable after the 2008-2009 fiscal meltdown -- a corollary down side to treasury bills does exist. There is the matter of custody risk: should the custodian (money market fund or brokerage firm) that holds (has custody of) treasury security investment fail, it is no longer possible to simply get back the securities. The best case scenario is that investors can legally get their securities back, but it could take a good long while. AT-bill is essentially just an IOU -- a promise to pay -- from the United States government. And like any IOU, it is possible to renege on a T-bill.
Credit ratings are an important investor consideration, and the downgrade of U.S. debt from AAA to AA+ by Standard & Poor's in 2011 was an unexpected dark horse that shook up, but did not disrupt, the…
