Treasury bills are the shortest term debt securities sold by the U.S. Department of Treasury. Trading T-bills allows investors to make bets on the direction of short-term interest rates. Since the price of a T-bill will change very little with the typical move in interest rates, traders play Treasury bills and the corresponding interest rates through the use of derivative futures securities.
Treasury Bill Futures
To make any money trading T-bills using a brokerage account, you would need to buy and sell millions of dollars worth of bills to earn enough profits to produce a livable wage. Using Treasury bill futures lets a trader control $1 million worth of T-bills with a margin deposit of a few hundred dollars — $330, to be exact, as of October 2013. Futures also allow traders to make bets for price moves in either direction, up or down.
Prices Move Inverse to Rates
Use T-bill futures to trade based on your expectation of which direction short-term rates will move. If you think rates will fall, you want to buy — called a long position in futures jargon — T-bill futures in your commodity futures trading account. If rates then decline, you can the sell the futures and lock in a profit from the higher prices. If you think rates will go up, you would sell futures to establish a short position in your account. If interest rates do go higher, the value of the futures will fall and you can buy back the short contracts to profit from the decline in price.
The Fed Sets the Rates
The T-bill futures contract is priced on the yield of a 13-week Treasury bill. The interest rate on the three-month T-bill directly reflects the short-term interest rate policy of the Federal Reserve Board as indicated by the Federal funds discount rate. As a result, changes in the T-bill rates and prices depend on what the Fed decides to do with short-term rates. T-bill futures with expiration dates up to two years in the future can be traded based on your expectations of what the Fed will do with short-term interest rates.
Day Trading and Scalping
Even when short-term interest rates are not moving, it may be possible to day-trade T-bill futures using a scalping strategy. Scalping involves taking small profits as futures prices move up and down. Each minimum price change or “tick” on the T-bill contract is worth $12.50. For example, you could trade 10 contracts at a time with a $3,300 margin deposit and trade to take two tick profits after trading costs. The result would be $250 in profit per trade, which you may be able to do several times a day. This strategy requires an analysis system that helps you determine when prices will change directions as they fluctuate throughout the day.