A Treasury bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Departmentwith a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. These securities are widely regarded as low-risk and secure investments.
The Treasury Department sells T-bills during auctions using a competitive and non-competitive bidding process. Non-competitive bids, also known as non-competitive tenders, have a price based on the average of all the competitive bids received.
The U.S. government issues T-bills to fund various public projects, such as the construction of schools and highways. When an investor purchases a T-bill, the U.S. government effectively writes an IOU to the investor. Thus, T-bills are considered a safe and conservative investment since the U.S. government backs them.
T-bills are generally held until the maturity date. However, some holders may wish to cash out before maturity and realize the short-term interest gains by reselling the investment in the secondary market.
T-bills can have maturities of just a few days, but the maturities listed by the Treasury are are four, eight, 13, 17, 26, and 52 weeks. When interest rates are expected to continue rising, longer maturity dates pay more than shorter dates. Conversely, if interest rates are expected to fall, longer maturity dates might have lower interest rates.
| Daily Treasury Bill Rates, Coupon Equivalent Yield (as of market close 02/02/2024) | ||||||
|---|---|---|---|---|---|---|
| Date | 4-Week T-Bills | 8-Week T-Bills | 13-Week T-Bills | 17-Week T-Bills | 26-Week T-Bills | 52-Week T-Bills |
| Today | 5.39 | 5.40 | 5.39 | 5.37 | 5.24 | 4.82 |
| 1 Week Ago | 5.38 | 5.40 | 5.38 | 5.36 | 5.20 | 4.77 |
| 1 Month Ago | 5.39 | 5.41 | 5.38 | 5.39 | 5.26 | 4.81 |
| 1 Year Ago | 4.57 | 4.59 | 4.65 | 4.73 | 4.80 | 4.64 |
| 5 Years Ago | 2.41 | 2.41 | 2.42 | N/A | 2.49 | 2.57 |
| 10 Years Ago | 0.12 | N/A | 0.06 | N/A | 0.07 | 0.12 |
T-Bill Redemptions and Interest Earned
T-bills are issued at a discount from the par value (also known as the face value) of the bill, meaning the purchase price is less than the face value of the bill. So, for example, a $1,000 bill might cost the investor $950.
When the bill matures, the investor is paid the face value—par value—of the bill they bought. If the face value amount exceeds the purchase price, the difference is the interest earned for the investor. T-bills do not pay regular interest payments as with a coupon bond, but a T-bill does include interest, reflected in the amount it pays when it matures.
T-Bill Tax Considerations
The interest income from T-bills is exempt from state and local income taxes. However, the interest income is subject to federal income tax. Investors can access the research division of the TreasuryDirect website for more tax information.
Purchasing T-Bills
There are two ways to buy T-bills. You can buy them directly from the government or on the secondary market through a broker.
Buying T-Bills from TreasuryDirect
New issues of T-bills can be purchased at auctions held by the government on the TreasuryDirect site. These are priced through a bidding process, with bidders ranging from individual investors to hedge funds, banks, and primary dealers. These purchasers may then sell the bills to other customers in the secondary market.
A competitive bid sets a price at a discount from the T-bill's par value, letting you specify the yield you wish to get from the T-bill. Noncompetitive bids 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.
Buying T-Bills on the Secondary Market
You can also buy Treasury bills through a bank or a licensed broker. Once completed, the purchase of the T-bill serves as a statement from the government that says you are owed the money you invested, according to the terms of the bid.
Treasury Bonds vs. Treasury Notes vs. Treasury Bills
Treasury bills are one of several types of debt issued by the U.S. Department of the Treasury. In addition to T-bills, there are also Treasury bonds and Treasury notes, each referring to different debt products. All three represent fixed-term debt over a period of time.
The main difference between these types of debt is the time to maturity. Treasury bills represent short-term obligations that mature anywhere between a few days to 52 weeks. Treasury notes are medium-term securities that take between two and 10 years to mature. Treasury bonds have the longest lifetime and mature in 30 years.
Pros and Cons of T-Bills
Treasury Bills are one of the safest investments available to the investor. But this safety can come at a cost. T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates are rising, existing T-bills fall out of favor since their rates are less attractive compared to the overall market. As a result, T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on 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 discounted price to the face value of the bond. The gain is realized when the bond matures, which is the difference between the purchase price and the face value.
However, if they're sold early, there could be a gain or loss depending on where bond prices are trading at the time of the sale. In other words, if sold early, the sale price of the T-bill could be lower than the original purchase price.
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
What Influences T-Bill Prices?
T-bill prices fluctuate similarly to other debt securities. Many factors can influence prices, including macroeconomic conditions, monetary policy, and the overall supply and demand for Treasuries.
Maturity Dates
Maturity dates tend to dictate T-bill's prices. T-bills with longer maturity dates can have higher returns than those with shorter maturities when interest rates are rising. In other words, short-term T-bills might be discounted less than longer-dated T-bills when rates are rising, and when rates are dropping, they might be discounted more.
Market Risk
Investors' risk tolerance affects prices. For instance, T-bill prices tend to drop when other investments, such as equities, appear less risky and when the U.S. economy is expanding. Conversely, investors tend to invest in T-bills as a safe place for their money during recessions, spiking the demand for these safe products.
The Federal Reserve
The monetary policy set by the Federal Reserve through the federal funds target rate range also strongly impacts T-bill prices. The federal funds rate refers to the interest rate that banks charge each other for lending them money from their reserve balances on an overnight basis.
The Fed increases or decreases this rate in an effort to contract or expand the supply of money in the economy, which affects lending, inflation, purchasing power, and eventually, employment. A lower rate allows banks to have more money to lend, while a higher fed funds rate decreases the amount of money in the system.
As a result, the Fed's actions impact short-term rates, including those for T-bills. A rising federal funds rate tends to draw money away from Treasuries and into higher-yielding investments. Since the T-bill rate is fixed, investors tend to sell T-bills when the Fed is hiking rates because the T-bill rates are less attractive. Conversely, if the Fed is reducing interest rates, money flows into existing T-bills driving up prices as investors buy up the higher-yielding T-bills.
| Fed Funds Rate | Yields on Existing Bills | Investors |
|---|---|---|
| Increases | Goes down | Sell Existing T-Bills |
| Decreases | Goes up | Buy Existing T-Bill |
The Federal Reserve is also one of the largest purchasers of government debt securities. Buying and selling these securities is how the Fed acts to increase and decrease the money supply. When it sells its holdings, money is sent to and held by the Federal Reserve.
When it buys securities, money flows out to investors, which is then deposited into banks, spent, or invested in other types of securities. Banks then have more to lend, and consumers have more to spend. Influencing the money supply in this way helps the Fed manage inflation.
T-bill prices tend to rise when the Fed performs expansionary monetary policy by purchasing Treasuries. Conversely, T-bill prices fall when the Fed sells its debt securities.
Inflation
Treasuries also have to compete with inflation, which measures the pace of rising prices in the economy. Even if T-bills are the most liquid and safest debt security in the market, fewer investors tend to buy them in times when the inflation rate is higher than the T-bill return.
For example, if an investor bought a T-bill with a 2% yield while inflation was 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.
Example of a Treasury Bill Purchase
On May 13, 2023, the last 52-week T-bill issued by the Treasury was in April. It sold for $95.419667 per $100. If you had purchased a $1,000 52-week T-bill that day, you would have paid $954.19667, then received $1,000 on maturity. Thus, you would gain $45.80 in interest when the T-bill matured.
Are Treasury Bills a Good Investment?"
T-bills may be a good investment depending on your situation and goals.
T-bills can play a role in a diversified portfolio as a safe place to park cash that provides some returns while preserving liquidity and principal. However, they generally provide low returns compared to other fixed income products. They are best suited for short-term savings goals where capital preservation is the priority. Determining if they make sense requires assessing one's risk tolerance, return objectives, and investment time horizon.
What Are the Maturity Terms for Treasury Bills?
U.S. Treasury bills are short-term government bonds and are issued with six terms. These consist of four-, eight-, 13-, 17-, 26-, and 52-week terms.
What Kind of Interest Payments Will I Receive If I Own 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.
How Can I Buy a Treasury Bill?
U.S. Treasury bills are auctioned on a regular schedule. You can buy T-bills from the government using the TreasuryDirect website. Registering is free, and the site functions like a brokerage account that holds your bonds. In addition to bidding on new issues, you can set up reinvestments into securities of the same type and term. For instance, you can use the proceeds from a maturing 52-week bill to buy another 52-week T-bill. Certain brokerage firms may also allow trading in U.S. Treasuries.
Where Is My Paper Hard Copy of the T-Bill I Bought?
T-bills and other government bonds are no longer issued on paper and are only available digitally through TreasuryDirect or your broker.
The Bottom Line
Treasury Bills, or T-bills, represent short-term debt obligations by the Treasury. Because the U.S. government backs them, they are considered extremely low-risk, although they also have relatively low returns.
