Following up on my earlier post this week about buying the 3-month T-bill at Schwab, I also used Treasury Direct to buy my first 4-week bill this week. T-bill rates are rebounding after a big dip in September, as you can see below:

This chart is based on data from Treasury Direct’s official auction results page. Keep in mind that “Investment Rate” is the same as APR, not APY. This week’s investment rates were 5.038% for the 28-day bill, 5.072% for the 91-day bill, and 5.132% for the 182-day bill, which are equivalent to APYs of 5.156%, 5.169%, and 5.198% respectively.

I’d linked an account at my credit union to Treasury Direct back in August, which was surprisingly easy to do. At one point, I managed to forget my password and get locked out of my account, so had to phone Treasury Direct to get help. Much to my surprise, my phone call was immediately answered by a woman who sounded like she was sitting at her desk in her office, not at a call center. That was by far the fastest service from the government that I’ve ever received!

So, kudos to Treasury Direct, though I still prefer to buy my 3- and 6-month bills via Schwab just because it saves me the hassle of moving money back and forth between my accounts. However, at some point, the difference in yields between the 4-week and 3-month and 6-month T-bills might be great enough that going through the hassle of transferring money to buy the 4-week might be worth it.

I have to admit that the more I find out about what Schwab offers, the more I like being their client. Sound strange? A few months ago, I started looking at managing my cash more intelligently rather than just having it sit passively in a money market fund that wasn’t earning nearly as much interest as some other options available out there.

When I discovered that Schwab offered an easy way to purchase CDs online, I bought a few 3-month CDs through Schwab yielding 5.3-5.4%. Unfortunately, I soon realized that CDs were probably not the best investment out there for us. Why? Because as California residents, the interest earned from CDs would be subject to our state income tax rate of 9.3%, and there were other instruments out there with comparable returns that were exempt from state income tax: treasuries.

Last week, I started looking at buying treasuries again. T-bill yields had dipped in September but rebounded strongly and were certainly well worth the consideration of anyone who lived in a state with state income tax. (I’ve previously written about how to calculate tax-equivalent yields and provided an online calculator to do so, as well as about using Treasury Direct to buy treasuries, if you’re looking for some background information.)

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While I was out of the country, I wasn’t able to follow up on buying T-bills through Treasury direct. Now that I’m back, it seems that recent T-bill yields have taken a slight plummet. As a California resident though, these rates are still attractive in comparison to high-yield savings accounts and rates on CDs because T-bills are exempt from state income tax. For most people in California, including us, that represents a whopping 9.3% of our income.

Assuming a conservative 25% federal tax bracket, even the current 28-day yield of 4.86% APY (September 14, 2006 issue date) gives a tax-equivalent yield of 5.55%, which is higher than what I’m getting in my money market fund, CDs, or what’s being offered in high-yield savings accounts, all of which are subject to state income taxes.

The 6-month T-bill APY of (5.2% unadjusted, 5.94% under the same assumptions above) is even more attractive, and I’ll have to decide by the end of the week if I want to go ahead and put some money in the 182-day auction coming up next Monday, or play a bit more wait-and-see-what-the-Fed-signals before buying in. If you’re interested in learning more, there’s a very helpful and regularly updated thread about treasury bill rates over at Fatwallet.

Just to refresh your memory, the equations for calculating tax-equivalent yields are the following:

If itemizing (deducting) state income taxes from federal income taxes:

I’ve just added a simple javascript-based tax-equivalent yield calculator for non-itemizers under the online calculators section of this site.

So if you live in a state with state income tax, T-bills may still be worth your consideration. I feel I still need to catch up on what’s been happening recently before I can decide on when and what to T-bill to purchase (it’s amazing how being gone 2-3 weeks can throw a wrench into your entire schedule), but I’ll be sure to write updates here on any decisions I make.