How T-bills work?
As I understand the price of T- Bills is determined by an auction, which could mean I might owe $$ to the gov. if ti’s below the price I was charged. Hoe secure are they and an I understanding this auction thing correctly? I would greatly appreciate your advice on this. thank you, Eva
Terry Says
You’ve got it all wrong! Every Monday (unless a holiday) the government borrows billions of dollars to repay old maturing debt and to have extra money to keep the government running! (We already have a $20 trillion dollar debt burden, and as the government continues to overspend its tax revenues, it keeps borrowing on a regular basis!)
The interest the government must pay on these 3-month and 6-month Treasury bill IOUs is set at “auction”. That is the largest buyers — typically banks, foreign government, bond dealers, etc — place their bids. Since those Treasury securities are traded 24 hours in a global marketplace, the interest rates are pretty will known in advance. Individual buyers — like you and me, through TreasuryDirect, agree to accept the “average rate” set at the auction.
The money for your purchase is then automatically taken out of the checking or money market account you have linked to TreasuryDirect. And in a sort of quirk, they don’t take the full purchase amount out — instead you get the interest up-front, as they withdraw only enough to pay for the securities, less the interest. So a $10,000 t-bill purchase might result in a $9600 withdrawal from your account, and the specific discount depends on the interest rate!
