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Why Put Your Money in an Investment Earning 0%?

This article was written by in Career and Work, Investing. 10 comments.


Yesterday I mentioned that the U.S. Treasury was able to raise $40 billion in a one-day auction of 35-day Treasury bills. When you bid for these investments, you could either compete with others by offering to invest at the lowest interest rate you’re willing to accept or bid “non-competitively,” accepting whatever the Treasury Department determines the rate will be. Many people are willing to lend money to the government at a rate of 0%. That sounds like a horrible deal, but here’s a few reasons why investors will bid 0% on a short-term Treasury bill.

The stock market is likely to decline. With the media reporting to collapse of Wall Street, putting your money in an investment earning 0% is a better proposition than leaving it in stocks poised to lose money in the short term. I don’t suggest market timing or guessing what the stock market will do over the short term. Did you know on Wednesday that the S&P 500 was going to be up 4.3% on Thursday? I didn’t. Nevertheless, there are situations where not losing money (in a 0% T-bill) is a better option than probably losing money (in the stock market).

More banks are likely to fail. Washington Mutual still seems to be the bank that the media is giving a hard time. It is quite possible, however, that the next bank to fail will be a surprise. As long as your money is protected by the FDIC, you will be able to withdraw your funds. You may not be able to access your funds as quickly as you like, however. Moving your savings account to a Treasury bill might earn you less interest — or it might not — but you’re guaranteed to be able to access your funds. Accepting a low interest rate is a trade-off for much less risk in a volatile environment.

Just because you bid 0% doesn’t mean you’ll get 0%. When the Treasury bill auction ends, all winning bidders get the same interest rate. Winners are chosen from the bottom up, so a low bid helps to guarantee you’ll win. But all investors will receive the interest rate of the highest winning bid. In Wednesday’s auction for 35-day T-bills, the highest interest rate accepted was 0.3%, so this is the rate all winning bidders, even those who bid 0%, received. Now 0.3% isn’t much higher than 0%, but it does match what you might be earning in a standard brick-and-mortar savings account. Bidding 0% means you won’t be bidding too high to be excluded from the issuance.

You expect the dollar’s value to increase relative to a foreign currency. If you live in Japan, for example, and do all your banking in yen, a low interest rate in USD might be a good investment if you expect the dollar to increase against the yen. If the dollar gains an annual rate of 5% against the yen over the period of the Treasury bill and your yield on the T-bill is 0.3%, then your returns after conversion back to yen would be similar to a local bank account earning 5.3%.

Bidding 0% on a Treasury bill doesn’t sound like a bad idea right now, particularly if you think the other options available for short-term investments are worse.

Published or updated September 19, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar Adam Lehman

But isn’t the dollar expected to decline in value?

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avatar Ben

Don’t you also get the 0.3% plus the rate of inflation? Inflation was 6% last year I’m not sure what it’s is at the moment but 6.3% TIP is awesome considering what everything else is doing.

Or am I getting the government bond issues confused here.

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avatar Ben

I guess I did get the bonds/bills/notes confused. The (http://www.treasurydirect.gov/RI/OFBills) were at 0.1% but the TIPS (http://www.treasurydirect.gov/RI/OFNtebnd) which is a much longer committment and comes with a higher rate.

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avatar Jim

OK so then nobody actually got a 0% rate. If everyone got the higher rate then I think its pretty definite that people just strategically bid 0% cause they wanted to make sure they were among the winners but they knew the actual % rate they’d get would be higher then that.

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avatar Andy

I moved the funds in my Vanguard prime money market account to my online ING Direct savings account. This is not a reflection on Vanguard, because it is the best fund manager in the industry, it is more a risk management move on my part due to all the financial market and institutional turmoil. Also getting 3% at ING (you can get more elsewhere) rather then the sub 1% treasury rates.

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avatar Someone

But why wouldn’t one just place a non-competitive bid, rather than a 0% bid? Placing a 0% bid just drives the bidding down, while placing a non-competitive bid will still let you get whatever the chosen rate was.

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avatar Luke Landes ♦127,372 (Platinum)

Most individuals bid non-competitively but larger institutions bid competitively. There’s a $5 million limit to a non-competitive bid, which forces larger investors to bid competitively.

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avatar EMilster

Interesting point about not investing in the Stock Market. I am on the PR team for MoneyAisle.com and we are really supporting the idea of investing in CDs vs. the stock market. Sure CDs might not have as high a ceiling for return as stocks, but the floor is less likely to crash as well. Especially for those eyeing retirement, CDs seem to be a much smarter place for your money these days.

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avatar purpelnoon

So if I have a CD with Washington Mutual earning a nice 5%, if the bank kicks the bucket and the FDIC steps in, do I still continue to earn interest? What happens in a case like this?

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avatar Harold

Another reason is the foreign governments need some where to put USD that we send overseas due to our purchases of their goods.

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