What Is a T-Bill?
A Treasury Bill or T-Bill is a debt obligation issued by the U.S. Department of the Treasury. Of the debt issued by the U.S. government, the T-Bill has the shortest maturity, ranging from a few days to one year. T-Bills are typically sold at a discount to par value (also known as face value). When the bill matures, you are paid par value. The difference between your purchase price and par value represents your interest.
T-Bills can be purchased in increments of $100 (in maturity value). They resemble zero-coupon bonds in that they are issued at a discount and mature at par value, with the difference between the purchase price and par value representing the interest paid to the investor. T-Bills are issued in maturities of 4, 8, 13, 17, 26, and 52 weeks. There are auctions featuring different maturities every week except the 52-week T-Bill, which is sold every four weeks.
For example, a T-Bill with a maturity of 26 weeks might be sold every week for $999.86 and mature at a value of $1,000. The discount rate is calculated at the time of auction.
Key Takeaways
- Treasury bills are debt obligations issued by the U.S. Department of the Treasury.
- T-bills have the shortest maturity date of all the debt issued by the federal government.
- You can purchase T-bills in $100 increments in non-competitive and competitive bids.
- T-bills are subject to federal, but not state and local taxes.
- Yields on T-bills are generally lower than similar investments, such as certificates of deposit.
T-Bills vs. Treasury Bonds vs. Treasury Notes
The primary difference between a T-Bill, a Treasury Bond, and a Treasury Note is the maturity date. The Treasury Bond has the longest maturity at 20 or 30 years, though maturities of 50 and 100 years are also under consideration.
The Treasury Note matures in two to 10 years. The T-Bill matures in a year or less. The debt is issued by the U.S. Treasury to raise capital, and the return of the principal plus interest is guaranteed to investors regardless of what happens in the bond or stock markets.
How to Bid for T-Bills
Investors can submit two different types of bids for T-Bills:
- Non-competitive bids. This type of bid is akin to a market order. The investor agrees to accept the discount rate determined at auction. Investors who take this bid are guaranteed to have their orders filled. A noncompetitive bid can be placed through TreasuryDirect or a bank or broker.
- Competitive bids. With this type of bid, the investor specifies the discount rate they are willing to accept. If your bid is better than the discount rate set in the auction, your order will be filled. Otherwise, your order could be partially filled or rejected. This type of bid cannot be placed through Treasury Direct. You must use a bank or broker.
In a single auction, investors can buy up to $10 million in T-Bills in non-competitive bidding, or 35% of the offering amount in competitive bidding.
Tax Treatment and Yields
The interest paid on T-bills is taxed at the federal level but is exempt at the state and local levels. For this reason, T-bills are attractive to investors in states with high tax rates. Investors have the option of having up to half of the interest paid on their bills withheld for tax purposes.
The yields on T-Bills are typically slightly lower than comparable securities such as certificates of deposit (CDs). This is because of their perceived safety due to the government guarantee of interest and principal. Of course, the yield on a T-Bill rises as the time to maturity lengthens.
Investing With T-Bills
Investors with short time horizons can use a laddering strategy to maximize yields and minimize risk. This concept allows parcels of cash to become available periodically that can be reinvested at prevailing market rates.
Another strategy is to invest the majority of a portfolio in T-Bills and then allocate a very small percentage into aggressive assets such as derivatives that could appreciate substantially if the markets move in the right direction.
Of course, if the markets move in the opposite direction, the T-Bills will grow back to the original amount of principal at maturity. Or they may need to be reinvested a time or two, depending on the ratio of T-Bills to risky assets in the portfolio.
You can purchase previously issued T-bills on the secondary market through a broker using the latest bid/ask prices.
Safety and Risks
Because the primary characteristic of T-Bills is that they offer a guaranteed return of principal, they typically function as the safe portion of an investment portfolio. They are often used in lieu of cash by knowledgeable investors who understand they pay a higher rate of interest than cash instruments or accounts such as money market funds.
This also makes them attractive for institutions bound by fiduciary requirements that prevent them from risking the principal of their funds in any way. However, T-Bills are still subject to both inflation risk and interest-rate risk, and investors who seek to outperform the markets over time should generally look elsewhere to fulfill their investment objectives.
The Bottom Line
T-Bills are useful for conservative investors who seek higher yields than what is available in cash accounts such as money market funds. Although T-Bills rarely offer real inflation-adjusted returns, they do offer liquidity, the safety of principal, and exemption from state and local taxation.
FAQs
T-bills are known to be low-risk, short-term investments when held to maturity because the U.S. government guarantees them. Investors owe federal taxes on any income earned, but no state or local tax. Treasury bills typically earn lower returns than other debt securities and even some certificates of deposit.
What is a treasury bill for dummies? ›
Treasury bills are short-term investments backed by the U.S. Treasury, making them a safe place to hold your cash and earn a modest interest rate. These investments are typically for one year or less, and you purchase them at a discount. At maturity, you receive the face value, letting you earn a return.
How does a treasury bill work? ›
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.
How much does a $1000 T-bill cost? ›
Treasury bills, or bills, are typically issued at a discount from the par amount (also called face value). For example, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86 ($1,000 x . 99986111 = $999.86111). * When the bill matures, you would be paid its face value, $1,000.
What is the downside of T-bill? ›
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.
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.
Are Treasury bills better than CDs? ›
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
Do you pay taxes on Treasury bills? ›
Key Takeaways
Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT. Investors can opt to have up to 50% of their Treasury bills' interest earnings automatically withheld.
How much will I make on a 4 week treasury bill? ›
Basic Info. 4 Week Treasury Bill Rate is at 4.97%, compared to 5.00% the previous market day and 5.28% last year. This is higher than the long term average of 1.47%. 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 T-bills a good investment right now? ›
Are Treasury bills a good investment? T-bills are known to be low-risk, short-term investments when held to maturity because the U.S. government guarantees them. Investors owe federal taxes on any income earned, but no state or local tax.
To buy Treasury bills on TreasuryDirect, you need to log into your account (or open an account). Then, go to "BuyDirect." Select "Bills - Short-term securities of 1 year or less." From there, you'll see a long list of options.
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 is the smallest T-bill you can buy? ›
The minimum amount that you can purchase of any given Treasury Bill, Note, Bond, TIPS, or FRNs is $100.
Is it possible to lose money on Treasury bills? ›
The federal government has never defaulted on an obligation, and it's universally believed it never will. Investors who hold T-bills can rest assured that they will not lose their investment. T-Bills are considered a zero-risk investment thanks also to Treasury market liquidity.
Are T-bills safe if the market crashes? ›
Bonds are generally considered a less-risky complement to the volatility of stocks in an investment portfolio. U.S. Treasurys, and specifically Treasury bills and Treasury notes, are the benchmark for a nearly risk-free investment if held to maturity.
What's better than T-bills? ›
Compared with Treasury notes and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.
What is the point of buying a Treasury bill? ›
T-bills are known to be low-risk, short-term investments when held to maturity because the U.S. government guarantees them. Investors owe federal taxes on any income earned, but no state or local tax. Treasury bills typically earn lower returns than other debt securities and even some certificates of deposit.
Can you withdraw money from Treasury bills? ›
You can sell a T-Bill before its maturity date without penalty, although you will be charged a commission. (With CDs, you pay a sizeable penalty for early withdrawals.)
How much will I make on a 3 month treasury bill? ›
3 Month Treasury Rate is at 4.96%, compared to 4.97% the previous market day and 5.56% 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.
