Takeaways
- The federal government issues U.S. Treasury bills to fund projects and services.
- T-bills are currently yielding around 5%, offering stable returns for investors.
- T-bills are considered ideal high-yield investments to add to your portfolio.
- Institutional investors and investment managers consider T-bills the risk-free rate.
- Investors can purchase T-bills through their bank, brokerage account, or TreasuryDirect.
What Are U.S. Treasury Bills?
U.S. Treasury Bills, commonly called T-bills, are short-term debt securities issued by the U.S. Department of Treasury. T-bills are considered one of the safest investments available because they are backed by the full faith and credit of the U.S. government. This makes them popular investments among retail investors, institutional investors, and money managers.
T-Bills are sold in $100 increments, ranging from $100 to $10 million, with maturities of one year or less.[1] These short-term securities don't pay interest income like a traditional note or high-yield checking account. Instead, U.S. Treasury Bills are sold at a discount to their face value, and investors receive the total face value at maturity. Investors earn an investment gain when the face value exceeds the purchase price.
Take the Next Step:
Member FDIC
Quontic High Yield Savings Account
Smart Money Rating: 5/5
APY: 4.50%
Required Minimum Balance: $100
How U.S. Treasury Bills Work
Investing in T-Bills is surprisingly straightforward. Beginner investors and seasoned professionals follow the same process to purchase U.S. Treasury Bills. Here’s how it works.
T-bills are debt securities issued by the U.S. Treasury, which means that when you buy a T-bill, you essentially lend money to the U.S. government for a specified period. The government uses this borrowed money to fund various public projects and services and to manage the national debt.
T-bills are sold at auction, where the price is determined by competitive bidding. They are issued with a par value, often called the face value. Investors can participate in these auctions by submitting competitive bids, specifying the discount rate they will accept based on the face value. Alternatively, they can enter non-competitive bids, agreeing to accept the rate determined at the auction.
The Treasury holds regular auctions for T-Bills with maturities of:
- 4 weeks
- 8 weeks
- 13 weeks
- 26 weeks
- 52 weeks
After purchasing your T-bill based on the amount you want (in increments of $100), you determine how long you want to hold it. For investors focused on short-term capital preservation, 4- or 8-weeks maturities work well. Investors searching for more yield will select longer maturities, like 26 or 52 weeks.
At maturity, the U.S. government pays the T-bill holder the total face value of the T-bill. For example, if you purchased a 26-week T-Bill with a face value of $1,000 for $980, you would receive $1,000 when the bill matures, yielding a $20 profit.
Treasury Bill Purchase Example
To illustrate how T-bills work, consider an investor who wants to purchase a 13-week T-bill with a face value of $1,000. The investor submits a non-competitive bid at auction and purchases the T-bill for $990.
When the T-bill matures in 13 weeks (91 days), the investor will receive $1,000, realizing a $10 profit. Considering the purchase price, the effective yield is higher than the discount rate because the investment was made at $990, not $1,000.
Where to Buy Treasury Bills
Investors can purchase T-Bills through several avenues:
- TreasuryDirect: The U.S. Department of the Treasury’s online platform allows investors to buy T-Bills directly from the government. TreasuryDirect.gov is a convenient and cost-effective way to purchase T-Bills because there are no fees or commissions. Many individual investors prefer TreasuryDirect because of its simplicity and direct access to government securities.
- Banks and Financial Institutions: Many banks and brokerage firms offer T-Bills to their customers. While this can be convenient for investors who prefer to manage all their investments in one place, these institutions may charge fees or commissions.
- Secondary Market: Investors can also purchase T-Bills in the secondary market through brokers. The secondary market can provide opportunities to buy T-Bills already in circulation at different prices based on current interest rates and market conditions.
Take the Next Step:
Acorns Website
Acorns Investing App
Smart Money Rating: 5/5
Intro Offer: $20 Bonus Investment
Best For: Beginner Investors
Annual Fee: N/A
Are U.S. Treasury Bills a Good Purchase?
T-Bills are the closest thing to a risk-free investment because the U.S. government has never defaulted on payment. As a result, investors have flocked to U.S. Treasury Bills, particularly in times of uncertainty. Here are three reasons investors choose T-bills:
- Safety: T-Bills are backed by the U.S. government, making them one of the safest investments. Investors consider T-bills risk-free and allocate a portion of their holdings to T-bills. This security is particularly compelling during times of market turbulence.
- Liquidity: T-bills are highly liquid and are easily converted to cash. This makes them an excellent investment for investors who need quick access to their funds but also want to earn interest on idle cash.
- Predictable Returns: The return on T-Bills is known upfront, which gives investors the predictability they need to manage a fixed-income portfolio or maximize their investment diversification.
Smart Tip:
In 2023, the U.S. Department of Treasury sold approximately $22 trillion in marketable securities in 428 public auctions. According to TreasuryDirect.gov, Treasury marketable securities include Bills, Notes, Bonds, Treasury Inflation-Protected Securities (TIPS), and Floating rate notes. [2]
Disadvantages of T-Bills
Even though investors always chase the perfect investment, each asset class serves a particular purpose. U.S. Treasury Bills are no different. Whether it makes sense to invest in T-bills depends on your financial goals and current portfolio construction. Here are several disadvantages to investing in T-bills.
- Lower Returns: T-bills' safety and liquidity typically result in lower investment returns than other investments, such as stocks or corporate bonds. Because T-bills are considered to be risk-free, investment managers must earn a return higher than what U.S. treasury bills guarantee.
- Inflation Risk: All investments involve risk. T-Bills have an inherent inflation risk. Investors use T-bills to hedge against inflation. However, the fixed return on T-Bills may not keep pace with inflation, potentially eroding purchasing power over time. (Read more about how to beat inflation.)
Read More: How the Federal Fund Rates Works
Take the Next Step:
Why Do Treasury Bills Fall in Value?
Although T-Bills are considered safe investments, their value can fluctuate in the secondary market based on several factors:
- Interest Rates: There is an inverse relationship between interest rates and the price of T-bills. When interest rates rise, the prices of existing T-bills fall because new T-bills are issued at higher rates, making older, lower-yielding T-bills less attractive to investors.
- Inflation: If inflation expectations increase, the real return (the return after adjusting for inflation) on T-Bills decreases. Investors may demand higher yields to compensate for inflation, driving down the price of existing T-Bills.
- Economic Conditions: During economic uncertainty or instability, investors retreat to safer assets like T-Bills, which increase demand and prices. Conversely, demand for T-Bills may decrease during economic growth and rising risk appetite, leading to lower prices.
For example, during the 2008 financial crisis, the demand for T-Bills surged as investors sought a haven for their cash, resulting in historically low yields. Conversely, during periods of economic expansion, investors may prefer higher-yielding assets – like cryptocurrencies, real estate, or stocks – reducing demand for T-Bills and pushing their prices lower.
Smart Summary
Depending on your portfolio, T-bills could be a perfect way to augment your investing strategy. U.S. Treasury Bills are a secure, short-term, and liquid investment that the U.S. government backs. Their predictable returns are beneficial if you are looking for capital preservation. However, like with all investments, you should weigh their lower returns and vulnerability to interest rate and inflation fluctuations relative to other investment opportunities. Understanding how T-Bills work, where to purchase them, and why their value fluctuates will help you decide if T-Bills make sense for your investment portfolio.
You Might Also Like:
(1) U.S. Department of the Treasury. Treasury Bills. Last Accessed January 14, 2025.
(2) U.S. Department of the Treasury. Auctions. Last Accessed January 14, 2025.
