This post was originally published on May 7th, 2024, and updated on June 30th, 2025.
Treasury Bills (T-Bills) are short-term debt securities issued by the government to finance public expenditures. These instruments offer a low-risk option for investors seeking a temporary investment opportunity with a modest return. T-Bills are sold at a discount to their face value and do not pay periodic interest. Instead, the return to investors comes from the difference between the purchase price and the amount received at maturity.
Because of their minimal risk and high liquidity, Treasury Bills (T-Bills) are popular among both institutional and individual investors. Their typical maturities range from a few days to one year, making them attractive for conservative portfolios and cash management strategies.
To understand Treasury Bills (T-Bills), it's helpful to break down how they're issued, priced, and redeemed.
The U.S. Department of the Treasury issues T-Bills through two primary auction types: competitive and non-competitive bidding. In a non-competitive bid, individual investors commit to accepting the yield determined at the auction, guaranteeing full allocation of the amount they wish to invest. This method is commonly used by those who prioritize certainty over yield maximization.
On the other hand, competitive bidders, typically large institutional investors, specify the yield they are willing to accept. However, there's no guarantee they will receive the full amount they request if their bid is not within the accepted yield range. These auctions are conducted on a regular schedule, and purchases can be made either directly through TreasuryDirect or through brokers.
Treasury Bills (T-Bills) do not offer periodic interest payments. Instead, they are sold at a discount from their face value and redeemed at par upon maturity. The difference between the purchase price and the maturity value constitutes the investor's earnings.
For instance, if a $1,000 T-Bill is purchased for $980, the $20 gain upon maturity represents the yield. This yield is typically annualized and expressed as a percentage of the purchase price, referred to as the discount yield. Since T-Bill prices are inversely related to yields, fluctuations in market interest rates influence their pricing.
T-Bills are issued with several maturity options tailored to different investment needs. Common maturities include 4-week, 8-week, 13-week, 17-week, 26-week, and 52-week terms. Investors seeking very short-term placements may opt for the 4-week or 8-week bills. At the same time, those who want a slightly longer time horizon without moving into longer-duration instruments, such as Treasury Notes, might select the 26-week or 52-week options. The ability to choose between these various maturities adds flexibility in aligning investment strategies with cash flow requirements.
T-Bills offer several distinct advantages, especially for those seeking safety and simplicity in their investments.
Treasury Bills (T-Bills) are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government, meaning that the likelihood of default is extremely low, which appeals to investors looking for capital preservation. As such, T-Bills are often used as benchmarks for measuring the risk-free rate in financial models and investment comparisons.
One of the primary attractions of Treasury Bills (T-Bills) is their high liquidity. Investors can readily buy or sell T-Bills in the secondary market, which is robust and active. Even though T-Bills are typically held until maturity, the ease with which they can be liquidated makes them a convenient option for investors who might need quick access to funds without significant loss of value.
The interest earned on Treasury Bills (T-Bills) is subject only to federal income tax, not state or local taxes. This tax exemption makes T-Bills more attractive to investors in states with high income tax rates, as it effectively increases the after-tax yield compared to other taxable fixed-income instruments.
Because T-Bills come in a variety of short-term maturities, they are ideal for investors who need predictable returns within a fixed time frame. They can be used in laddering strategies, where multiple bills with staggered maturities are held to optimize liquidity and reinvestment opportunities. This flexibility allows T-Bills to serve both strategic and tactical roles in an investment portfolio.
Investors have multiple options for purchasing T-Bills depending on their preferences and investment goals.
TreasuryDirect is the official online platform operated by the U.S. Department of the Treasury, allowing individuals to purchase T-Bills directly from the government. This option eliminates brokerage fees and gives investors full control over their account, including automatic reinvestment options and the ability to schedule purchases. TreasuryDirect is particularly suitable for retail investors who are comfortable managing their portfolios online.
For those who prefer a more traditional approach, T-Bills can be bought through brokers or banks. These intermediaries may offer added convenience, such as portfolio integration, research tools, and customer support. However, transactions through brokers may include commissions or markups that reduce net returns. Institutional investors frequently utilize these channels to access both the primary and secondary markets for Treasury bills.
Investors seeking indirect exposure can opt for money market mutual funds that invest in Treasury Bills (T-Bills) and other short-term instruments. These funds offer professional management, diversification, and ease of access, making them attractive to individuals who prefer not to manage their securities. However, investors should be mindful of fund fees and the underlying portfolio composition to ensure it aligns with their risk and return objectives.
While T-Bills are not designed for maximizing long-term growth, they offer specific advantages to certain types of investors:
Market dynamics and auction demand influence the interest earned on Treasury Bills (T-Bills), as these securities are issued at a discount and redeemed at face value. Rather than paying traditional interest, T-Bills provide a return based on the spread between purchase price and maturity value. The yield, expressed as an annualized rate, reflects how much an investor earns over the life of the T-Bill. Several core factors play a role in determining these rates:
While both are government securities, T-Bills and bonds serve different roles within a portfolio.
To illustrate how Treasury Bills (T-Bills) work in practice, consider this scenario: An investor purchases a 26-week T-Bill with a face value of $10,000 at a discounted price of $9,800. This means the investor pays $9,800 upfront and receives $10,000 six months later upon maturity. The $200 difference represents the return earned on the investment, and when annualized, it implies a yield of approximately 4.08%. This straightforward structure appeals to those who value clarity in return calculations and a defined investment horizon.
Investors utilize T-Bills in various ways, depending on their objectives and market outlook.
In times of market uncertainty or low equity valuations, investors often prefer to keep their funds in liquid and secure instruments. Treasury Bills (T-Bills) provide a haven for short-term capital while still generating modest returns. This approach can be beneficial for investors who are waiting for more favorable market entry points or who need to hold cash temporarily between investment cycles.
Large institutions and corporations frequently use Treasury Bills (T-Bills) to manage surplus cash. These instruments allow them to earn interest on idle funds while maintaining the ability to access capital in the near term. Because T-Bills are highly liquid and backed by the government, they are often integrated into institutional cash management strategies, particularly for short-term obligations and payroll reserves.
Incorporating Treasury Bills (T-Bills) into an investment portfolio can enhance diversification and reduce overall risk. Their performance tends to be stable and uncorrelated with more volatile asset classes, such as stocks. For this reason, T-Bills are frequently used in conservative asset allocations or as part of a broader fixed-income strategy to smooth portfolio returns during periods of market turbulence.
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