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

What Is a Treasury Bill?

A Treasury bill (T-bill) is a short-term U.S. government debt obligation with terms ranging 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 $10 million in non-competitive bids. The Treasury sells T-bills during auctions using competitive and non-competitive bidding processes.

How to Buy Treasury Bills

The U.S. Department of the Treasury issues T-bills to raise cash to fund the federal government's spending. T-bills are generally held either until the maturity date or cashed before maturity. Investors can buy T-bills in electronic form from a brokerage firm, generally with a small fee, or directly from TreasuryDirect, the online platform of the U.S. Treasury. Here are the steps to do so:

1. Gather the following information: Your Social Security number 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 set up your TreasuryDirect account.
6. Verify your account: After verification, log in and click on the "Buy Direct" tab.
7. Make your choice: Select "Treasury bonds" as the security you wish to buy, 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 accuracy.
10. Submit the order: You may be asked to accept terms and conditions, after which you'll click to send in your order.

After submitting your order, you should receive an on-screen confirmation indicating your request has been processed. You'll get 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.

Treasury Bill Rates

The maturities available for Treasury bills are four, six, eight, 13, 17, 26, and 52 weeks. 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 (also called the par value) of the bill. Since the face value exceeds the purchase price, the difference is the interest earned.

For example, suppose 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 don't offer 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.

Pros and Cons of T-Bills

T-bills pay a fixed rate of interest, which can provide a stable income. However, should interest rates rise, existing T-bills would fall out of favor since their returns are less than those of new T-bills. 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 nearly zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit. Also, 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.

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.