What Is a Treasury Bill? T-Bills Defined

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A treasury bill is a government-issued security that matures in 52 weeks or less. It is priced at a discount, and when it matures, the government pays you the full face value.

Essentially, you are loaning the government money in exchange for the promise of receiving a higher amount at maturity.

How Treasury Bills Work

Here are more details about how Treasury bills work, per the U.S. Department of the Treasury: 

• Maturity period: 4, 8, 13, 17, 26 or 52 weeks
• Denominations: Treasury bill denominations are available in multiples of $100.
• Interest/Profit: Interest is the difference between the face value and purchase price and is paid when the bill matures.
• Tax: You must pay federal income taxes on interest earned. Interest is not subject to state and local taxes.
• Availability: Most T-bills (excluding 52-week and cash management bills) are auctioned every week. Auctions for 52-week T-bills occur every four weeks.

An Example

What does this mean for you? Say, for example, you purchase a 13-week T-Bill with a face value of $1,000. If the price per $100 is $98.750, you pay $987.50 for the bill.

If you hold the bill until maturity, you will receive the full face value of $1,000, having earned $12.50 in interest. Alternatively, you can sell it on the secondary market before it matures.

What Is a Treasury Bill Yield?

When you’re shopping for treasury bills, you’ll see the word yield used a lot. This can help you determine how much money you’ll earn. According to TreasuryDirect, the yield to maturity how much money you’ll earn each year. It will be expressed as a percentage.

Benefits of Investing in Treasury Bills

Like with every other investment product, it helps to do your research before purchasing Treasury bills. Here are the benefits that draw most investors to T-bills:

• Low risk due to U.S. government backing
• Short-term investment option with predictable returns
• Exempt from state and local taxes
• Easy to buy and sell on the secondary market

Risks of Treasury Bills

• Treasury bill yields are lower than bonds and certificates of deposit.
• If sold early, T-bill prices can be lower than the purchase price, particularly in a rising interest-rate environment.
• T-bills may not keep up with inflation, thereby resulting in a negative real return.

How To Buy Treasury Bills

There are two ways to buy Treasury bills. The first is directly from the U.S. Treasury. You don’t need a Treasury bill account, per se, but you will need to open a general account with TreasuryDirect. When you purchase T-bills through the U.S. Treasury, you agree to accept the discount rate available at auction time. This is called a non-competitive bid.

You also can buy T-bills through a bank, broker or dealer. If you buy the bills through a bank, broker or dealer, you may place a non-competitive or competitive bid. With a competitive bid, you specify the rate that you are willing to accept. However, there is no guarantee that your competitive bid will be accepted.

Taxation of Treasury Bills

One of the main benefits of investing in Treasury bills is that you are exempt from state and local tax. This is particularly valuable if you live in a high-tax state like California, Hawaii or New Jersey. However, regardless of where you live, you’re responsible for paying federal income tax on your Treasury bill income.

The IRS will send you a 1099-INT any year that you have T-bill income, and you’ll have to report this amount on your Form 1040. If you sell a T-bill before it matures, you’ll receive a Form 1099-B to report the transaction.  

Treasury Bills vs. Treasury Bonds vs. Treasury Notes

Like a Treasury bill, Treasury notes and bonds are instruments of the U.S. Treasury backed by the federal government. The primary difference among the three is the length of their terms.

• Treasury bills are sold with terms of 4, 8, 13, 17, 26, and 52 weeks.
• Treasury notes are sold with terms of 2, 3, 5, 7, and 10 years.
• Treasury bonds are sold with terms of 20 and 30 years.

Treasury bills, notes, and bonds are all fixed-income investments sold by the U.S. government to fund debt and pay expenses. However, a T-bill is a zero-coupon security that does not pay interest until it matures.

Treasury notes and bonds, on the other hand, pay interest semi-annually, more like a traditional bond. Here’s a clear comparison of the three types of government securities:

Selling Treasury Bills Before Maturity

T-bills are highly liquid securities, meaning you can sell them on the secondary market at any time. Most brokers are capable of handling this type of transaction, especially full-service firms. However, some online banks may not be equipped to handle T-bill transactions.

If you hold your T-bills in your Treasurydirect.gov account, you’ll have to transfer them to a bank, broker or other financial services firm in order to sell them.

It’s important to note that if you sell a T-bill before maturity, you may receive less than you paid, especially if market interest rates have moved higher. You may also have to pay a fee or commission to sell your T-bill. 

Treasury Bills and Interest Rates

T-bill yields are directly affected by changes in market interest rates. When market rates rise, the price on existing T-bills falls. Conversely, when market rates fall, T-bill prices rise. This makes T-bills a good asset to consider for a diverse investment portfolio.

You don’t have to worry about the state of the market if you’re going to hold your investments until maturity.

Should You Invest in Treasury Bills?

T-bills are a go-to product for investors looking for a safe place to invest their money. During periods of market instability, they may pull their money out of volatile stocks and hold it in lower-risk securities.

Since Treasury bills are backed by the U.S. government, there is virtually no risk of default. But investors can lose money on these securities if they sell them before maturity and market interest rates have risen. 

However, in exchange for this safety, T-bills generally don’t provide the types of returns available with other, longer-term investments like stocks and mutual funds. 

For this reason, T-bills are best suited for conservative investors or those prioritizing capital preservation over appreciation. 

Jose Vazquez contributed to the reporting for this article.

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