Interest rates are rising again and so is the public's interest in Treasury bills.
During previous interest surges such as in 1969-70 and 1973-74, the Treasury bill was the only place for a small investor to earn much more than the federally controlled interest rate on bank savings accounts.
At present, however, small investors have many other places in which to invest their funds, including special bank and savings and loan association certificates of deposit whose interest rates and maturities are tied to Treasury bills.
The new certificates of deposits were created by federal regulators to give savings and loan associations a fighting chance at keeping many of the deposits they lost to Treasury bills in earlier years. Because S&Ls make most of the new home loans in the nation, when they run short of deposits and stop making mortgages, it depresses housing.
So far, the new certificates have kept new funds flowing into S&Ls, and the home building industry is going strong. But interest rates continue to rise as the Federal Reserve Board tries to fight inflation and prop up the dollar with a stingy monetary policy. And as interest rates climb, S&Ls are finding it increasingly expensive to sell the new certificates.
Furthermore, as investors are perhaps beginning to discover, the interest on the special certificates is fully taxable, while the interest on federal securities is not taxable at the state and local level (it is taxable on federal returns).
For whatever reason, small investor interest has been rekindled in Treasury bills, the shortest of the debt obligations issued by the federal government. Dorothy Mougian, who runs the office that sells bills at the main Treasury Department building, said 50 to 60 individuals usually show up during the week to buy a bill. Last week, she said, about 200 made applications (tenders) to purchase a Treasury bill.
James Bailey of the Baltimore branch of the Richmond Federal Reserve Bank reports a "substantial increase" in both mail applications and walk-in applications for Treasury bills ever since bill rates went over 8 percent several months ago. And as rates continue to rise, so does investor interest. At last Monday's auction, small investors took $439 million of the $2.3 billion in 13-week bills sold by the Treasury. The week before, small investors (if a $10,000 investor can be called a small investor) took only $351 million of the $2.3 billion.
There was a similar increase in small-investor interest in six-month Treasury bills. On Nov. 6, small investors bought $ $273 million of the $3.4 billion of six-month bills sold; last Monday, they bought $351 million of $3.4 billion.
Treasury bill rates are near their record 1974 highs. Last Monday the average investor received a yield of 8.593 percent on three-month bills and 9.291 percent on six-month bills. Those rates are down sharply from Nov. 6 in part because of heavy demand for the virtually riskless Treasury securities.
The Treasury auctions bills every Monday, except when a Monday is a holiday. Then the auction is held on the previous Friday.
Small investors who want to buy a bill usually submit what is called a "noncompetitive tender," which means the investor gets whatever the average interest yield is at that particular auction.
Big, sophisticated buyers submit competitive tenders, some of which the Treasury rejects. Anyone who submits a noncompetitive tender is virtually assured of getting a bill.
Investors can purchase a Treasury bill in person or by mail from either the Treasury Department or Federal Reserve banks or their branches (the main Federal Reserve Board on Constitution Avenue does not sell bills). Applications can be made in person up until 1:30 p.m. the day of the auction. Mail applications must be postmarked by midnight the day before the auction.
Either the Federal Reserve banks or the Treasury will send the potential investor an application by mail. In the metropolitan area, the easiest way is to apply in person in Room 2124 of the Main Treasury building at 15th and Pa. Ave. NW. Whether buying by mail or in person, the investor will need a certified check or a cashiers' check for the face amount of the bill to be purchased. The minimum-size bill is $10,000. They are sold in multiples of $5,000 above that ($15,000, $20,000 and so forth). When buying from the Treasury, the check should be made out to the Bureau of Public Debt. When buying through a Federal Reserve Bank, make the check out to that bank. In Baltimore, it would be the "Federal Reserve Bank of Richmond, Baltimore Branch."
Many brokerage houses and banks also will purchase bills for customers, although they generally charge a fee. For example, the brokerage house Dean Witter Reynolds charges $25 plus 25 cents per thousand. The charge on a $10,000 bill would be $27.50. The Treasury and the Federal Reserve banks do not charge a fee.
The bills bear their interest by being sold at a discount. For example, at last Monday's auction, the average price on a three-month bill was 97.828. That means if an individual bought a $10,000 bill, he or she actually would pay only $9,782.80. The Treasury or the Federal Reserve Bank sends the investor a check for the difference (in this case $217.20) on the day the bills are formally based, usually the Thursday following the Monday auction.
When the bills mature (in three months or six months), the Treasury either will send a check for $10,000 or, if the investor so chooses, the Treasury will "roll it over," that is, reinvest it at the next auction. The investor can ask the Treasury to roll it over on the original application or can do so later so long as the Treasury has the instructions (a special form is required) at least 10 days before the bill matures.
The Treasury used to send investors an actual certificate. It does not do so any longer. Instead the agency sends the investor a statement of account about four to six weeks after the auction (long after the check for the interest arrives).