Treasury bills — or T-bills — are short-term U.S. debt securities issued by the federal government that mature over a time period of four weeks to one year. Since the U.S. government backs T-bills, they're considered lower-risk investments.
The most common terms for T-bills are for four, eight, 13, 17, 26 and 52 weeks. The shorter terms to maturity differentiate them from other Treasury-issued securities.
While interest rates and inflation can affect Treasury bill rates, they’re generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.
How Treasury bills work
Treasury bills are assigned a par value (or face value), which is what the bill is worth if held to maturity. You buy bills at a discount — a price below par — and profit from the difference at the end of the term.
While T-bills don’t pay interest like other Treasurys, the difference between your discounted price and the par value is essentially the "interest" earned. It's as simple as that — you gave the government a short-term loan by buying T-bills, and they paid you back with "interest" at the end of the term.In other words, T-bills pay no interest payments leading up to their maturity.
To see how a Treasury bill purchase works, let's look at a Treasury bill auction. On February 28, 2024, the Treasury held an auction for a 17-week Treasury bill with an issue date of March 5 and a maturity date of July 2. The price per $100 amounted to about $98.27, or an annualized discount rate (shown as "high rate" in TreasuryDirect) of 5.225%.
If you set your purchase price to be $1,000 for this auction, you would have paid $982.73 on March 5. On July 2, you'd receive $1,000, earning $17.27 on your investment.
Now, if you were to theoretically reinvest in this T-bill for one year, you could arrive at an annual investment rate for your 17-week T-bill based on the actual purchase price of $982.73.
To explore how this works, use our T-bill calculator below.
Treasury bill rates compared to other Treasury securities
Treasury bills, notes and bonds are three types of U.S. debt securities that mainly differ in the length of maturity (shortest to longest). Treasury notes are intermediate-term investments that mature in two, three, five, seven and 10 years. Treasury bonds mature in 20 or 30 years. Unlike T-bills, Treasury notes and Treasury bonds pay interest every six months.
» Learn more:Treasury bonds vs. notes vs. bills
Are Treasury bills a good investment?
Ultimately, whether Treasury bills are a good fit for your portfolio depends on your risk tolerance, time horizon and financial goals.
T-bills are known to be low-risk short-term investments when held to maturity since the U.S. government guarantees them. Investors owe federal taxes on any income earned but no state or local tax.
However, Treasury bills also typically earn lower returns than other debt securities and even some certificates of deposit. As a result, Treasury bills may be most advantageous to conservative investors who are less willing to take risks but still want to earn a little interest.
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Keep in mind that economic growth or decline, interest rates and inflation can affect Treasury bill rates. Here's how it works.
Demand for T-bills often drops during inflationary periods if the discount rate offered doesn't keep pace with the inflation rate.
The Federal Reserve sets lending rates between banks. It can lower the rate to encourage lending or raise the rate to contract the amount of money in the economy. When interest rates are high, as in 2023, investors tend to look toward higher-yield investment options and away from lower-yield Treasury bills.
Frequently asked questions
How can I buy a T-bill?
You can buy Treasury bills directly from the government at TreasuryDirect.gov or through a brokerage account. TreasuryDirect is straightforward and accessible to anyone with internet access, a taxpayer identification number or Social Security number, a U.S. address, and a checking or savings account to link for payment.
What kind of interest payments will I receive on a T-bill?
Treasury bills are a type of “zero coupon bond” and 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.
Where can I receive a hard copy of the T-Bill I bought?
T-bills are now only available in electronic form.
Next Steps:
Compare the best online brokers for buying bonds
How to buy Treasurys
What a brokerage account is and how to open one
The 10-year Treasury yield: What it is and why it matters
Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.
T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market. T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.
Treasury bills are a type of “zero coupon bond” and 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.
Investable amount: Generally speaking, the upside of setting up a T-bill ladder versus keeping it in a high-yield savings account is not worth it unless you have more than $2M to invest. Also, you'll want to make sure that the money to intend to invest is not likely to be needed in the short term.
Interest rate risk: As interest rates ascend, the value of existing bonds with lower interest rates tends to diminish, potentially leading to capital losses if the bonds are sold prior to maturity.
Right now, the 3-month Treasury bill rate is 5.25% while the 30-year Treasury rate is 4.58%. So, if you're looking for a risk-free way to earn interest on your cash over a short period of time, investing in a T-bill could be a good choice.
During a recession, investing in cash and cash equivalents becomes a strategic choice for investors who are hoping to preserve their capital and maintain liquidity. Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit.
If you're saving for a goal less than a year away: If you're saving money for a goal with a short-time horizon, T-bills can make more sense than CDs. They provide a higher APY than savings accounts, and they're more liquid than CDs.
When short term T bills mature, the interest income is mistakenly shown as capital gains in tax reports. The interest is taxable on Fed, tax exempt on most states. T bills are short term zero coupon purchased at a discount and paid at face vale at maturity.
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
4 Week Treasury Bill Rate is at 5.28%, compared to 5.28% the previous market day and 4.32% last year. This is higher than the long term average of 1.41%. 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.
But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered. If you're interested in investing in Treasury bonds or have other questions about your portfolio, consider speaking with a financial advisor.
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.
T-bills are considered risk-free because you can be certain you'll get your money back. But risk and return are directly proportional, and T-bills offer very low returns on investment. Consequently, if you invest in T-bills, there's a risk you're foregoing the opportunity to earn a higher return elsewhere. Inflation.
Just as prices can rise in an economy, so too can interest rates. As a result, Treasury bonds are exposed to interest rate risk. If interest rates are rising in an economy, the existing T-bond and its fixed interest rate may underperform newly issued bonds, which would pay a higher interest rate.
You can keep a T-bill until it matures or sell it before then on the secondary market. Interest earned on a T-bill is subject to federal taxes but not state or local income taxes. Their short-term nature and high liquidity make Treasury bills appealing to some investors.
The risk-free rate is the rate of return of an investment with no risk of loss. Most often, either the current Treasury bill, or T-bill, rate or long-term government bond yield are used as the risk-free rate. T-bills are considered nearly free of default risk because they are fully backed by the U.S. government.
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