Treasury Bills (T-Bills): What They Are and How To Invest (2024)

A Treasury bill (T-bill) is a short-term U.S. government debt obligation backed by the U.S. Department of the Treasury. Terms range from four to 52 weeks. T-bills are issued at a discount from the par value, also known as the face value.

Treasury bills are usually sold in denominations of $100. However, some can reach a maximum denomination of $5 million in noncompetitive bids. The Treasury sells T-bills during auctions using a competitive and noncompetitive bidding process.

Key Takeaways

  • A Treasury bill (T-bill) is a short-term debt obligation backed by the U.S. Department of the Treasury with a one-year maturity or less.
  • Treasury bills are usually sold in denominations of $100 and can reach a maximum denomination of $10 million.
  • T-bill rates depend on interest rate expectations.

Treasury Bills (T-Bills): What They Are and How To Invest (1)

How To Buy Treasury Bills

The U.S. Department of the Treasury issues T-bills toraise cash tofund the federalgovernment's spendingwhen there isa budget deficit. T-bills are generally held either until the maturity date or cashed before maturity. Investors can buy T-billsin electronic form from a brokerage firm, which could cost a small fee, or directly from TreasuryDirect, the platform of the U.S. Treasury. Here are the steps to do so:

  1. Gather the following information: Your Social Security number (SSN) or taxpayer identification number (TIN), a U.S. address, and checking or savings account numbers you'll use for your payments.
  2. Visit TreasuryDirect.gov: If you already have an account, proceed to step six.
  3. Select the account type: You'll select among individual, business, estate, organizational, or trust.
  4. Enter your personal information: Your TIN, U.S. address, and bank account details.
  5. Create a username and password: You'll use these to establish your TreasuryDirect account.
  6. Verify your account: After you do so, log in and click on the "Buy Direct" tab.
  7. Make your choice: Select "Treasury bonds" as the security you wish to purchase, along with the desired amount.
  8. Click "Buy."
  9. Review and confirm: You'll be directed to a page where you'll review the details of your purchase. Carefully check for their accuracy.
  10. Submit the order: You may be asked to accept terms and conditions, after which you'll click to submit your order.

After submitting your order, you should receive an on-screen confirmation indicating your request has been processed. You'll receive an email from TreasuryDirect confirming your purchase and providing a transaction summary. Your payment will typically be settled the next day. At maturity, the yield from your Treasury bond will be automatically deposited into your linked account.

T-bill prices tend to rise when the U.S. Federal Reserve is engaged in an expansionary monetary policy by purchasing Treasurys. Conversely, T-bill prices fall when the Fed sells its debt securities.

Treasury Bill Rates

The maturities available for Treasury bills are four, eight, 13, 17, 26, and 52 weeks (alternatively, one through four, six, and 12 months). When interest rates are expected to rise, longer maturity dates pay more than shorter dates. Meanwhile, if interest rates are expected to fall, longer maturity dates might have lower interest rates. Below is a chart of the four-week, six-month, and one-year T-bill yields for the last 10 years.

Redemptions and Interest

T-bills are issued at a discount from the par value. When the bill matures, the investor is paid the face value—par value—of the bill they bought. Since the face value exceeds the purchase price, the difference is the interest earned for the investor.

For example, the Treasury issues a 52-week T-bill in April and sells it on May 1. If it's sold for $95.419667 per $100 and an investor purchases a $1,000 52-week T-bill that day, they pay $954.19667 and receive $1,000 on maturity. The gain is $45.80 in interest when the T-bill matures.

T-bills do not pay regular interest payments as with a coupon bond, but a T-bill does include built-in interest, reflected in the amount it pays when it matures. The interest income from T-bills is exempt from state and local income taxes. However, the interest income is subject to federal income tax.

T-bills are issued at a discount from the par value, meaning the purchase price is less than the face value of the bill.

Pros and Cons of T-Bills

Pros and Cons of T-Bills

Pros

  • Zero default risk since T-bills have a U.S. government guarantee

  • T-bills offer a low minimum investment requirement of $100

  • Interest income is exempt from state and local income taxes but subject to federal income taxes

  • Investors can buy and sell T-bills with ease in the secondary bond market

Cons

  • T-bills offer low returns compared with other debt instruments

  • The T-bill pays no interest payments leading up to its maturity

  • T-bills can inhibit cash flow for investors who require steady income

  • T-bills have interest rate risk, so, their rate could become less attractive in a rising-rate environment

T-bills pay a fixed rate of interest, which can provide a stable income. However, should interest rates rise, the existing T-bills fall out of favor since their return is less than the market. For this reason, T-bills have interest rate risk, which means there is a danger that bondholders might lose out should there be higher rates in the future.

Although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit. Since Treasury bills don't pay periodic interest payments, they're sold at a discount to the face value of the bond. That means if the face amount is $1,000, they would sell for less than that, but mature to the full $1,000.

If sold early, there could be a gain or loss depending on where bond prices are trading at the time of the sale. The sale price of the T-bill could be lower than the original purchase price.

A competitive bid sets a price at a discount from the T-bill's par value. Investors can specify the yield. Noncompetitive bid auctions allow investors to submit a bid to purchase a set dollar amount of bills. The yield investors receive is based on the average auction price from all bidders.

Federal Reserve Policy

Like other debt securities, T-bill prices fluctuate. Many factors can influence prices, including macroeconomic conditions, monetary policy, and supply and demand for Treasurys.

Federal Reserve monetary policy and the federal funds rate affect T-bills. The rate is the interest rate that banks charge each other for lending money from their reserve balances overnight. The Fed increases or decreases this rate to contract or expand the money supply.

The Relationship Between the Fed Funds Rate and T-Bill Yields
Fed Funds RateYields on Existing BillsInvestors
IncreasesGoes upSell Existing T-Bills
DecreasesGoes downBuy Existing T-Bill

Example of Investing in a T-Bill

Let's say you want to own a $1,000, 1-year U.S. Treasury bill (T-bill) with a yield of 5%. Remember that treasury bills do not pay interest payments and are instead sold at a discount to their face value, where you receive the full face amount when the T-bill matures.

Here's how it works:

  1. Purchase Price: You buy a 1-year T-bill with a face value of $1,000. If the annual yield is 5%, you would pay approximately $950 for the T-bill upfront (the exact price would be calculated using the discount rate formula, but for simplicity, we'll use this close approximation).
  2. Maturity Value: At the end of one year, the T-bill matures, and you receive the full face value of $1,000.
  3. Return: Your return on the investment is the difference between the face value and the purchase price. In this case: $50 = $1,000 - 950.
  4. Effective Yield: The effective yield, or the return on your investment (ROI), would be about 5.26% (since you earned $50 on an initial investment of $950 over one year).

How Does Inflation Affect Treasury Bills?

Treasuries also have to compete with inflation, which is the pace of rising prices. Even if T-bills are the most liquid and safest debt security in the market, fewer investors tend to buy them when the inflation rate is higher than the T-bill's returns. If an investor buys a T-bill with a 2% yield while inflation is at 3%, the investor would have a net loss on the investment when measured in real terms. As a result, T-bill prices tend to fall during inflationary periods as investors sell them and opt for higher-yielding investments.

Are Treasury Bills Good Investments?

Treasury bills can be a good investment depending on your financial goals and risk tolerance. They are considered one of the safest investments available, backed by the full faith and credit of the U.S. government--meaning that you are not likely to experience losses on your initial investment. For a risk-averse investor, T-bills offer steady, albeit typically low, returns and are useful for preserving capital and maintaining liquidity.

However, their low-risk nature also means they generally provide lower yields compared to other investments, and potentially will not keep pace with inflation over time. The suitability of T-bills as an investment therefore depends on factors such as your investment horizon, risk tolerance, overall portfolio strategy, and current economic conditions.

Are Treasury Bills the Only Debt Security Issued by the U.S. Treasury?

Treasury bills are one of several types of debt issued by the U.S. Department of the Treasury. Treasury bonds and Treasury notes are fixed-term debt. Treasury bills are short-term obligations, up to a year. Treasury notes are medium-term securities, from two to 10 years. Treasury bonds have the longest time frame, maturing in 20 or 30 years. The U.S. Treasury also issues Treasury Inflation Protected Securities, or TIPS, which are linked to changes in the consumer price index (CPI).

What Type of Interest Payments Are Earned on a Treasury Bill?

The only interest paid will be when the bill matures. At that time, you are given the full face value. T-bills are zero-coupon bonds usually sold at a discount, and the difference between the purchase price and the par amount is your accrued interest.

The Bottom Line

Treasury Bills, or T-bills, are short-term debt obligations issued by the U.S. Treasury Department. They are considered safe investments because they are backed by the full faith and credit of the U.S. government. T-bills are sold at a discount from their face value and mature at face value. The difference between the purchase price and the maturity value is the interest earned by the investor.

Treasury bills are a good option for investors who are looking for a safe and secure investment with a short-term maturity while parking their money for a short period.

Correction—June 12, 2024: This article has been corrected to state that as the federal funds rate increases, the yield on existing T-bills goes up.

Treasury Bills (T-Bills): What They Are and How To Invest (2024)

FAQs

Treasury Bills (T-Bills): What They Are and How To Invest? ›

Treasury bills are assigned a par value (or face value), which the bill is worth if held throughout the term. You buy bills at a discount — a price below par — and profit from the difference at the end of the term. The most common terms for T-bills are four, eight, 13, 17, 26 and 52 weeks.

How do I invest in Treasury bills? ›

You can only buy T-bills in electronic form, either from a brokerage firm or directly from the government at TreasuryDirect.gov. (You can also buy Series I savings bonds through TreasuryDirect.gov). Versus Treasury bonds, Treasury bills have shorter maturity dates.

How much does a $1000 T-bill cost? ›

Purchase Price: You buy a 1-year T-bill with a face value of $1,000. If the annual yield is 5%, you would pay approximately $950 for the T-bill upfront (the exact price would be calculated using the discount rate formula, but for simplicity, we'll use this close approximation).

How much do you need to invest in the T-bill? ›

S$1,000

How much will I make on a 3 month treasury bill? ›

3 Month Treasury Rate is at 4.69%, compared to 4.69% the previous market day and 5.58% last year. This is higher than the long term average of 2.74%. The 3 Month Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 3 months.

Are T-bills better than CDs? ›

Both are low-risk, but T-Bills are considered safer because they are backed by the U.S. government, while CDs, though insured by the FDIC, carry slightly more risk if the bank fails, though that risk is minimal for insured amounts.

Do you pay taxes on T-bills? ›

Do Treasury bills get taxed? Yes, Treasury bills are taxed at the federal level using your marginal rate. However, income earned from Treasury bills is not subject to state tax or local income taxes.

Can I buy a T-bill at a bank? ›

T-bills sell in increments of $100 up to a maximum of $10 million, and you can buy them directly from the government through its TreasuryDirect website, or through a brokerage, bank or self-directed retirement account, like a Roth IRA.

What happens when a T-bill matures? ›

When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

How often do T-bills pay interest? ›

Treasury notes and Treasury bonds pay interest every six months. Treasury bills don't pay a fixed interest rate. Instead, they are sold at a discount rate to their face value. The “interest” you receive (so to speak) is the difference between the face value of the bill and its discount rate when it matures.

What is the downside to buying T-bills? ›

The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.

Why did Warren Buffett buy T-bills? ›

At Berkshire Hathaway's annual shareholder meeting in May, Buffett called T-Bills "the safest investment there is." Treasury bills also offer their investors tax incentives, as the interest paid is exempt from state and local taxes. The Treasury additions weren't the only bold move by Berkshire in the second quarter.

Are T-bills FDIC insured? ›

The FDIC does not insure U.S. Treasury bills, bonds or notes, but these investments are backed by the full faith and credit of the United States government.

How much will 100k be worth in 30 years? ›

Answer and Explanation: The amount of $100,000 will grow to $432,194.24 after 30 years at a 5% annual return. The amount of $100,000 will grow to $1,006,265.69 after 30 years at an 8% annual return.

How do T-bills pay out? ›

The only interest payment to you occurs when your bill matures. At that time, you are paid the par amount (also called face value) of the bill. (Bills are typically sold at a discount from the par amount, and the difference between the purchase price and the par amount is your interest.)

How much does a 4 week treasury bill pay? ›

4 Week Treasury Bill Rate is at 4.69%, compared to 4.71% the previous market day and 5.29% last year. This is higher than the long term average of 1.48%. The 4 Week Treasury Bill Rate is the yield received for investing in a US government issued treasury bill that has a maturity of 4 weeks.

Are Treasury bills a good investment? ›

Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time. Also, most Treasury securities are liquid, which means they can easily be sold for cash.

What is the current T-bill interest rate? ›

Basic Info

3 Month Treasury Bill Rate is at 4.53%, compared to 4.56% the previous market day and 5.32% last year.

Can I buy Treasury bills at my bank? ›

Individuals, organizations, fiduciaries, and corporate investors may buy Treasury securities through a bank, broker, or dealer. With a bank, broker, or dealer, you may bid for Treasury marketable securities non-competitively or competitively, but not both, for the same auction.

How do you get paid on Treasury bills? ›

We sell Treasury Bills (Bills) for terms ranging from four weeks to 52 weeks. Bills are sold at a discount or at par (face value). When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Foster Heidenreich CPA

Last Updated:

Views: 5657

Rating: 4.6 / 5 (56 voted)

Reviews: 87% of readers found this page helpful

Author information

Name: Foster Heidenreich CPA

Birthday: 1995-01-14

Address: 55021 Usha Garden, North Larisa, DE 19209

Phone: +6812240846623

Job: Corporate Healthcare Strategist

Hobby: Singing, Listening to music, Rafting, LARPing, Gardening, Quilting, Rappelling

Introduction: My name is Foster Heidenreich CPA, I am a delightful, quaint, glorious, quaint, faithful, enchanting, fine person who loves writing and wants to share my knowledge and understanding with you.