Understanding Treasury Bills: A Guide to Short-Term U.S. Debt Securities
Treasury bills (T-bills) are short-term U.S. debt securities issued by the federal government that mature in four weeks to one year. This shorter maturity period differentiates them from other Treasury-issued securities. Because the U.S. government backs T-bills, they’re considered virtually risk-free if held for the entire term.
T-bills are typically sold in $100 increments and can be purchased online from the Treasury Department, a brokerage, or a bank.
How Treasury bills work:
Treasury bills are assigned a par value (or face value), which the bill is worth if held throughout the term. You buy bills at a discount — a price below par — and profit from the difference at the end of the term. The most common terms for T-bills are four, eight, 13, 17, 26, and 52 weeks.
T-bills don’t pay interest in the same way as other Treasurys. Instead, you buy the bills at a discounted price and hold them until the end of the term. Once the term ends, or reaches maturity, you receive the face value. It’s as simple as that — you gave the government a short-term loan by buying T-bills, and they paid you back with “interest” at the end of the term.
T-bill example:
Let’s look at a Treasury bill auction to see how a Treasury bill purchase works. On May 15, 2024, the Treasury held an auction for a 17-week Treasury bill with an issue date of May 21 and a maturity date of Sept. 17. The price per $100 amounted to about $98.27, or an annualized discount rate of 5.225%. If you bought $1,000 worth of T-bills in this auction, that means you would have paid $982.73 on May 15. On Sept. 17, you’d receive $1,000, earning $17.27 on your investment.
To explore how this works, use our T-bill calculator below.
T-bill rates compared with other Treasury securities:
Treasury bills, notes, and bonds are three types of U.S. debt securities that mainly differ in the length of maturity (shortest to longest). Treasury notes are intermediate-term investments that mature in two, three, five, seven, and 10 years. Treasury bonds mature in 20 or 30 years.
Treasury notes and Treasury bonds pay interest every six months. Treasury bills don’t pay a fixed interest rate. Instead, they are sold at a discount rate to their face value. The “interest” you receive (so to speak) is the difference between the face value of the bill and its discount rate when it matures.
What causes Treasury bill rates to fall?
Economic growth or decline, interest rates, and inflation can all affect Treasury bill rates. Demand for T-bills often drops during inflationary periods if the T-bill rates offered don’t keep pace with inflation. When demand falls, T-bill rates often follow. The federal funds rate — the lending rate between banks — can also affect T-bill prices. When lending interest rates are high, investors tend to look toward more profitable investment options, such as stocks and funds, and away from Treasury bills.
Are Treasury bills a good investment?
T-bills are known to be low-risk, short-term investments when held to maturity because the U.S. government guarantees them. Investors owe federal taxes on any income earned, but no state or local tax. Treasury bills typically earn lower returns than other debt securities and even some certificates of deposit. As a result, Treasury bills may be most attractive to conservative investors who want to earn a little interest without the risk of more volatile investments such as individual stocks. Whether Treasury bills are a good fit for your portfolio depends on your risk tolerance, time horizon, and financial goals.
How to buy Treasury bills:
T-bills are now only available in electronic form. You can buy Treasury bills directly from the government at TreasuryDirect.gov or through a brokerage account or bank. TreasuryDirect is accessible to anyone with internet access, a taxpayer identification number or Social Security number, a U.S. address, and a checking or savings account to link for payment.
