Money Market Rates: Why T-bills Have Lower Rates Than Commercial Bills?
Written by
Chris Chisholm
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With the big hits in the financial industry in recent months many people are being cautious about their investment. If you’re tolerance to risk is low, but still want to make some returns on your investment you may want to consider putting your money into Treasury bills or mutual funds. While very stable, Treasury bills (also known as t-bills) tend to have lower rates, and hence lower yields, than commercial bills.
Both commercial bills, also known as commercial paper, and Treasury bills are popular investment products. Commercial bills or paper are issued by corporations, and t-bills are issued by the federal government. The question for the investor is, “Which of these issuing entities is most likely to be able to pay off their bill when it matures?” Invariably it is the Treasury bill, because the government can raise tons of money through taxes, whereas an individual corporation has limited revenue (by comparison). So, since no corporation can match the Treasury bill’s credit rating, the issuing corporation has to instead tempt investors with the promise of a higher yield. Therefore, Treasury bills tend to have lower rates than commercial bills.
As an investor, it usually makes sense to invest in a fund that diversifies between many commercial bills: that way you diversify your risk a bit, and still get the higher rates of commercial paper.
Still need more information about Treasury bills , commercial bills, commercial paper, and other investment products? Be sure to read “What is a Treasury Bill?,” read through our articles on investments, and visit treasurydirect.
