• A Treasury bill is a short‑term U.S. government debt security issued by the Department of the Treasury with maturities of less than one year (available terms currently: 4, 8, 13, 17, 26 and 52 weeks).
– T‑bills are sold at a discount to face (par) value and pay the full par value at maturity. The difference between purchase price and par is the investor’s interest.
Key takeaways
– Maturities: 4, 8, 13, 17, 26 and 52 weeks.
– Issued at a discount; no periodic coupon payments.
– Interest is exempt from state and local income taxes but subject to federal income tax.
– Extremely low credit/default risk (backed by the U.S. government), highly liquid, but generally low yield.
– Bought directly from TreasuryDirect or through brokerages (auction or secondary market).
How T‑bills work (simple mechanics)
– Issuance: Treasury auctions new T‑bills. Investors can submit competitive or non‑competitive bids.
• Non‑competitive bids: you accept the yield determined by the auction and are guaranteed to receive the amount you request (up to limits). This is the normal route for most retail investors.
• Competitive bids: you specify the yield you want; award depends on auction results and you may receive none or less than requested.
– Pricing: issued below par. Example: a $1,000 face T‑bill sold for $954.20; at maturity you receive $1,000 and the difference ($45.80) is interest earned.
– Taxation: interest is federal taxable income but exempt from state and local income taxes.
How to buy Treasury bills — practical steps
A. Buying directly via TreasuryDirect (recommended for most retail investors)
1. Open a TreasuryDirect account at treasurydirect.gov and verify identity.
2. Link and verify a bank account for payment and redemption.
3. Choose “BuyDirect” and select “Bills.” Pick a term (4–52 weeks) and enter purchase amount (minimum $100, in $100 increments).
4. Choose “non‑competitive” (typical retail choice). You can schedule a single purchase or a recurring purchase.
5. Submit; you’ll receive on‑screen confirmation and an email. Payment typically settles the next business day; at maturity the face amount is returned to your linked bank account or TreasuryDirect balance.
B. Buying through a brokerage
1. Log into your brokerage account and locate the fixed‑income or Treasury section.
2. You can either:
• Participate in a new issue auction (many brokers allow non‑competitive orders), or
• Buy on the secondary market (immediate settlement prices, may involve commissions/spreads).
3. Enter order size (many brokers allow $100 minimum) and submit. If buying secondary, be aware of price changes and bid/ask spreads.
C. Selling before maturity
– You may sell T‑bills in the secondary market through a broker. Price will depend on prevailing short‑term yields—selling before maturity can result in a gain or loss.
How yields are quoted and how to calculate returns
– T‑bills are often quoted using a “bank discount yield,” but investors commonly prefer an investment (or bond‑equivalent) yield. Two useful formulas
1. Bank discount yield (BDY) — often used in quotes:
BDY = [(Face − Price) / Face] × (360 / Days to Maturity)
2. Investment yield / annualized return (more directly shows investor return):
Investment yield = [(Face − Price) / Price] × (365 / Days to Maturity)
Example (numerical):
– Purchase price = $954.19667 for $1,000 face, maturity ~364 days (52 weeks).
– Dollar interest = $45.80333.
– Investment yield ≈ 45.80333 / 954.19667 × (365/364) ≈ 4.80% (approx).
– Bank discount yield ≈ 45.80333 / 1000 × (360/364) ≈ 4.53%.
Redemptions and interest
– T‑bills do not pay periodic coupons. Interest is realized as the difference between purchase price and face value at maturity.
– At maturity, TreasuryDirect or your broker will return the face amount to your linked account or account cash balance.
Pros and cons of T‑bills
Pros
– Very low credit/default risk (U.S. government backing).
– Highly liquid—large, active secondary market.
– Low minimum investment (typically $100).
– Interest exempt from state and local income taxes.
– Useful as a short‑term cash management tool and for capital preservation.
Cons
– Low yields compared with longer‑term Treasuries, corporate bonds, and many other investments.
– May not keep pace with inflation (real return can be negative if inflation > yield).
– No periodic cash flows (not ideal for investors who need regular income).
– Price (and thus return if sold early) is sensitive to changes in short‑term interest rates.
Federal Reserve policy and T‑bills
– Short‑term T‑bill yields are heavily influenced by Federal Reserve policy, including the federal funds rate and the Fed’s open market operations.
– If the Fed raises policy rates, short‑term yields (including bills) generally rise; if it eases or purchases securities (quantitative easing), yields tend to fall. Fed buying increases demand (raises price, lowers yield); Fed selling/less buying reduces demand (lowers price, raises yield).
How inflation affects Treasury bills
– Real return ≈ nominal yield − inflation rate. If inflation exceeds the nominal yield, the investor loses purchasing power.
– During inflationary periods demand for short‑term safe assets may fall unless yields rise to compensate; prices adjust accordingly. For inflation protection, investors may consider TIPS (Treasury Inflation‑Protected Securities) instead of T‑bills.
Are T‑bills good investments?
– They are appropriate when your goals include capital preservation, short‑term liquidity, and very low credit risk.
– Not ideal if you need returns that reliably outpace inflation or want regular coupon income.
– Use cases: short‑term cash parking, laddering to manage reinvestment risk, ultra‑conservative portions of a portfolio, treasury sweep accounts for cash.
Strategies and practical tips
– Laddering: buy T‑bills with staggered maturities (e.g., 4‑week, 13‑week, 26‑week) to smooth reinvestment and take advantage of changing yields.
– Cash management: use T‑bills for emergency funds or temporary cash while seeking longer‑term opportunities.
– Compare with alternatives: money market funds, high‑yield savings, certificates of deposit (CDs) — evaluate liquidity, yields, FDIC vs. Treasury backing, and tax treatment.
– Auction participation: retail investors typically use non‑competitive bids to ensure allocation without setting a specific yield. Competitive bidding is for advanced/large investors.
Other U.S. Treasury securities (not T‑bills)
– Treasury notes (T‑notes): maturities 2, 3, 5, 7, 10 years; pay semiannual coupons.
– Treasury bonds (T‑bonds): longer maturities (20–30 years); pay semiannual coupons.
– TIPS: Treasury Inflation‑Protected Securities adjust principal with inflation and pay semiannual interest.
– Treasury Floating Rate Notes (FRNs): short‑term floating coupons tied to discount rates.
– STRIPS: separate principal and interest payments of Treasury coupons into zero‑coupon securities.
What type of interest payment do T‑bills earn?
– No periodic coupon payments. Interest is “implied” and paid when the bill matures (the difference between purchase price and par). For tax purposes, that income is treated as interest.
Example of investing in a T‑bill (step‑by‑step)
– Suppose you want to purchase a 52‑week T‑bill for $1,000 face:
1. Open TreasuryDirect or log in to your brokerage.
2. Choose a purchase date and select the 52‑week bill.
3. Enter the dollar amount ($1,000, $10,000, etc.) and select non‑competitive bid.
4. Submit the order; payment will be scheduled (generally settles the next business day).
5. If the auction price is $954.19667 per $1,000 face, you pay $954.20 now and receive $1,000 at maturity (interest $45.80).
6. Report the interest as federal taxable income (but not state/local).
The bottom line
T‑bills are the shortest‑term, most liquid U.S. Treasury securities and are among the safest investments because of the U.S. government backing. They are ideal for preserving capital and managing short‑term liquidity, but their nominal yields are typically low and may not keep pace with inflation. Investors should choose T‑bills when safety and liquidity are priorities and consider other Treasuries or inflation‑protected securities when seeking additional yield or inflation protection.
Sources and further reading
– U.S. Department of the Treasury — TreasuryDirect:
– Investopedia — “Treasury Bill (T‑Bill)” (summary and examples)
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.