The American public first had the opportunity to loan money to the United States Government in 1776 when private citizens shelled out more than $27 million for government bonds to help finance the American Revolution. This tradition has continued down through the years. By buying bonds, American families have bankrolled not only the cost of various wars but have helped purchase the Louisiana Territory and financed the building of the Panama Canal, as well as many other major acquisitions and public works projects.

Buying savings bonds is an old American tradition. During WWII the workers in defense plants were encouraged to buy bonds with automatic payroll deductions. School children brought nickels to school on “Bond Day”. Each nickel purchased a stamp which was pasted into a “bond book”. When the book was full, it was exchanged for a savings bond.

The nice thing about these bonds is that they were purchased at a discount; a bond could be purchased for $18.75, held for seven years, and was then redeemable for $25. If held after maturity, the bond would continue to earn compound interest. Many bond series were interest-bearing for 20 years. It was not unusual for a bond to be worth more than eight times its face value.

The U. S. Government still sells savings bonds, but not at a discount. They are either fixed rate, with interest compounding from the date of purchase, or they are adjusted to inflation. This is still a good deal, as the interest is not taxable until the bonds are cashed in. In some cases the interest is non-taxable, such as when the redeemed bond is used for financing college education.

The total public debt of the U. S. government, as of December 9, 2008, is 10.7 trillion dollars. Of this amount, 6.4 trillion is held by the American public. Not all of this is held by individuals; many organizations and institutions use government obligations to maximize their reserve funds. In such cases the obligation is generally a treasury bill, note, or bond. Unlike savings bonds, these are marketable securities. In actual practice, few individuals sell Treasury items.

Treasury securities are sold at auction at stated intervals. An amount of money is offered to the public for either competitive or non-competitive bids. Individuals cannot submit competitive bids; these are reserved for financial institutions. A non-competitive bidder (read “Individual”), agrees to purchase a security at the rate set at auction.

Individuals can currently buy Treasury securities through a bank, broker, or dealer in the Commercial Book-Entry System which operates through Federal Reserve Banks. The Treasury’s stated long term goal is to consolidate all such retail sales in TreasuryDirect, an on-line site where an individual can have a personal account, with all securities held by the government rather than in paper form.

Several years ago, having some loose cash I was not ready to spend immediately, I began buying Treasury bills, or T-bills as they are commonly called. In early 2006 they were available with a minimum amount of $1000 with investment increments pegged at $500. They could be purchased for terms of 4, 13, or 26 weeks. The bills were discounted by the amount of interest they would earn. Then, as now, the funds were transferred between my bank and the Treasury by electronic transfer.

Recently the minimum purchase has been lowered to $100 with the investment increment set at multiples of $100, and an additional term of 52 weeks is now offered. Everything else remains much the same: bills are discounted by the amount of interest determined at auction, interest is not taxable until the year in which the bill is matured, and all interest is exempt from state and local income taxes.

What has changed tremendously since early 2006 is the interest rate. T-bills are always quoted with two rates. The actual yield, or interest rate, and a higher “investment” rate which reflects the actual return on the net (discounted) amount transferred from my bank account.

The first transaction I made, on January 4, 2006, was for a 4-week T-bill in the amount of $1000. The interest rate (yield) was 3.950%. As the Treasury took only $969.30 out of my bank account, this represented an investment rate of 4.017%, a bit less than the then-current Certificate of Deposit rates but – hey – I’d get my money back in four weeks and maybe then the rates would be higher than any CD that I might have locked myself into for 7 or 17 months.

Rates did climb steadily during 2006. By November the same $1000, repeatedly re-invested in 4-week T-bills, was earning 5.150% yield with a 5.243% investment rate. By mid-2007 rates were starting to slide. Not too badly, with 4-week T-bills paying a 4.745% investment return. By then I was into 13- and 26-week T-bills, which paid better than the 4-week bills. Still, it seemed a good idea to pull back a bit. As my T-bills matured I placed them in Treasury notes for 2- or 3-year terms. The rates were a bit lower than on T-bills but I figured I was locked in for the duration of the downward slide.

As 2008 came, it seemed I had made a wise choice. By June the 4-week T-bill was down to 1.840% yield, 1.868% investment. September was lower still: 1.575% yield, 1.599% investment. Recently it’s been downright ridiculous; last week the 4-week rate was only 0.005%. That’s less than 4 cents on 100 dollars for a 4-week period.

The absolute unbelievable, never-never-possible took place this morning. The rate on yesterday’s auction, reflecting the 4-week bills that will be issued tomorrow, was announced as exactly 0.000% yield, 0.000% investment return. The Treasury had tendered, i.e., offered, $128,455,438,000 to the general public. Of this, $32,420,952,000 was taken up, or “accepted”. That’s 32.4 million dollars on loan to the Treasury at 0% interest.

I don’t feel smug about getting out of T-bills before this happened. After all, I started investing in 2-year Treasury notes back in mid-2007; they will be maturing this coming year and the rates on T-notes are also scraping bottom.

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