Treasury Bill

The U.S. government is a financial pig. It borrows money alllll the time. Snort snort.

Somebody's gotta buy vibrating back massagers for all those senators' mistresses, right? T-Bills are just one way in which the government raises cash for itself to, uh…buy things.

How does they work? Investors write a check to the U.S. government, taking their hard-earned cash and giving it to Uncle Sam, who in return gives them a piece of paper promising to pay them back in a short period of time. So yeah...Treasury Bills are typically short in duration. And they sell at a discount to par, like a zero coupon bond. Meaning that an investor might pay $982 for a thousand dollar par bond which comes due in 6 months. The investor, for loaning the government her $982 in cash for 6 months, gets paid 18 dollars in rent on that money. There are no interest payments made along the way, as there would be in a traditional bond investment, which typically pays interest twice a year. In this case, the investor is just buying a grand at a discount. Simple.

And note that, in this case, the return is 18 bucks on a grand for 6 months. That implies an annualized interest rate on the money, i.e. over 12 months of…what? Well, our investor makes 18 bucks in 6 months, which is half a year, so double that is 36 bucks for a full year. Notionally, had the government rented that grand for a year, it would have paid 36 dollars for the privilege…or 3.6% annualized interest. That's 36 over a grand. But it's not quite accurate, because the investor didn’t put in a full grand...they put in less.

In this example, they invested 982 and got back 18 bucks for 6 months of doing a whole lot of nothing, other than watching the clock and hoping the U.S. government wouldn’t go bankrupt during that time period. So the interest rate of return to the investor? You take 18 bucks and divide it by 982, and you get about 1.83%. Annualize it, and you get a skosh more than 3.6%, i.e. something more like 3.66%.

Small change, but big numbers. And now, with investor money, the government is free to do all its pork spending. Maybe a nice, new sty for the Speaker of the House. Oink.