Key Takeaways
- Short-term U.S. government debt with maturities up to 52 weeks.
- Sold at discount; redeemed at face value for profit.
- Virtually risk-free, exempt from state and local taxes.
- Highly liquid; accessible via auctions and secondary markets.
What is Treasury Bills (T-Bills)?
Treasury Bills (T-Bills) are short-term securities issued by the U.S. Department of the Treasury to fund government operations. They have maturities ranging from a few days up to 52 weeks and are considered one of the safest investments due to being backed by the full faith and credit of the U.S. government.
Sold at a discount to their face value, T-Bills pay no periodic interest but return the full amount at maturity, making the difference your earnings.
Key Characteristics
T-Bills offer unique features that cater to conservative investors seeking liquidity and safety.
- Maturities: Available in 4, 8, 13, 17, 26, or 52 weeks; most are auctioned weekly with some irregular open market operations for cash management.
- Denominations: Sold in increments of $100, making them accessible for small and institutional investors alike.
- Risk Profile: Virtually risk-free, they yield less than longer-term bonds or stocks but provide dependable preservation of capital.
- Taxation: Interest income is subject to federal tax but exempt from state and local taxes, offering tax advantages compared to other fixed income.
How It Works
T-Bills function through discount pricing, where you purchase the bill below its face value and receive the full amount at maturity. The difference represents your rate of return.
For example, buying a $1,000 T-Bill for $950 with a six-month maturity yields a $50 profit. This return is calculated using discount yield formulas that reflect short-term market conditions and investor demand at auction.
Examples and Use Cases
T-Bills are widely used across industries and by various investors for cash management and risk mitigation.
- Airlines: Companies like Delta utilize short-term government securities as a low-risk parking place for liquidity.
- Retail Investors: Use T-Bills as a secure alternative to money market funds or as part of a diversified portfolio alongside options like low-cost index funds.
- Institutional Investors: Often compare T-Bill yields with commercial paper and benchmark bond ETFs to optimize short-term cash allocations, including options in bond ETFs.
Important Considerations
While T-Bills offer safety and liquidity, their lower yields may not keep pace with inflation over time. You should consider your investment horizon and compare T-Bills to other fixed-income options to align with your financial goals.
Purchasing directly through TreasuryDirect or via brokers provides access to auctions with competitive and non-competitive bids, ensuring flexibility in how you manage your holdings.
Final Words
Treasury Bills offer a secure, short-term investment option with predictable returns backed by the U.S. government. To maximize benefits, compare current auction rates and consider your liquidity needs before investing.
Frequently Asked Questions
Treasury Bills are short-term debt securities issued by the U.S. Department of the Treasury with maturities ranging from a few days up to 52 weeks. They are sold at a discount and redeemed at face value, making them a low-risk investment backed by the U.S. government.
T-Bills are sold below their face value and mature at full face value, so the difference between the purchase price and maturity value is the investor’s return. They do not pay periodic interest but offer a yield based on this discount.
T-Bills commonly mature in 4, 8, 13, 17, 26, or 52 weeks. Most maturities except the 52-week bills are auctioned weekly, while cash management bills have irregular schedules.
Yes, T-Bills are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government. They offer lower yields compared to longer-term securities but provide high liquidity and safety.
The interest earned from the discount on T-Bills is federally taxable and reported on Form 1099-INT at maturity. However, it is exempt from state and local income taxes, making T-Bills tax-efficient for many investors.
You can purchase T-Bills directly from the U.S. Treasury through TreasuryDirect.gov via auctions or indirectly through brokers and banks. Buying directly usually involves non-competitive bidding, which guarantees allocation at the auction rate.
T-Bills mature in one year or less and do not pay periodic interest, while Treasury Notes mature in 2 to 10 years and pay semiannual interest. Treasury Bonds have longer maturities of 20 to 30 years and also pay interest semiannually.
Yes, investors can sell T-Bills on the secondary market before maturity through brokers. However, selling early may result in a gain or loss depending on current interest rates and market conditions.
