What Is a Treasury Bill (T-Bill)?
A Treasury bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department. Terms range from four to 52 weeks. T-bills are issued at a discount from the par value, also known as the face value.
Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. The Treasury Department sells T-bills during auctions using a competitive and non-competitive bidding process.
Key Takeaways
- A Treasury Bill (T-Bill) is a short-term debt obligation backed by the U.S. Treasury Department with a one-year maturity or less.
- Treasury bills are usually sold in denominations of $1,000, while some can reach a maximum denomination of $5 million.
- T-bill rates depend on interest rate expectations.
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How to Buy Treasury Bills
The U.S. government issues T-bills to fund various public projects, such as the construction of schools and highways. T-bills are generally held until the maturity date or cashed out before maturity. Investors can buy T-billsin electronic form from a brokerage firm or directly from the government:
Treasury Direct: New issues of T-bills can be purchased at auctions held by the government at treasurydirect.gov. These are priced through bidding, with bidders ranging from individual investors to hedge funds, banks, and primary dealers. These purchasers may then sell the bills to other customers in the secondary market.
Secondary Market: Investors can buy Treasury bills through a bank or a licensed broker. Once completed, the purchase of the T-bill serves as a statement from the government noting the amount invested and the bid terms.
A competitive bid sets a price at a discount from the T-bill's par value. Investors can specify the yield. Noncompetitive bid auctions allow investors to submit a bid to purchase a set dollar amount of bills. The yield investors receive is based on the average auction price from all bidders.
Maturities
The maturity timeframe for Treasury bills cited by the U.S. Treasury is four, eight, 13, 17, 26, and 52 weeks. When interest rates are expected to rise, longer maturity dates pay more than shorter dates. Conversely, if interest rates are expected to fall, longer maturity dates might have lower interest rates.
| Daily Treasury Bill Rates, Coupon Equivalent Yield (as of market close 02/02/2024) | ||||||
|---|---|---|---|---|---|---|
| Date | 4-Week T-Bills | 8-Week T-Bills | 13-Week T-Bills | 17-Week T-Bills | 26-Week T-Bills | 52-Week T-Bills |
| Today | 5.39 | 5.40 | 5.39 | 5.37 | 5.24 | 4.82 |
| 1 Week Ago | 5.38 | 5.40 | 5.38 | 5.36 | 5.20 | 4.77 |
| 1 Month Ago | 5.39 | 5.41 | 5.38 | 5.39 | 5.26 | 4.81 |
| 1 Year Ago | 4.57 | 4.59 | 4.65 | 4.73 | 4.80 | 4.64 |
| 5 Years Ago | 2.41 | 2.41 | 2.42 | N/A | 2.49 | 2.57 |
| 10 Years Ago | 0.12 | N/A | 0.06 | N/A | 0.07 | 0.12 |
Redemptions and Interest
T-bills are issued at a discount from the par value. A $1,000 bill might cost the investor $950. When the bill matures, the investor is paid the face value—par value—of the bill they bought. If the face value exceeds the purchase price, the difference is the interest earned for the investor.
For example, a 52-week T-bill is issued by the Treasury in April and sells on May 1. If sold for $95.419667 per $100 and an investor had purchased a $1,000 52-week T-bill that day, they paid $954.19667, then received $1,000 on maturity. The gain was $45.80 in interest when the T-bill matured.
T-bills do not pay regular interest payments as with a coupon bond, but a T-bill does include interest, reflected in the amount it pays when it matures. The interest income from T-bills is exempt from state and local income taxes. However, the interest income is subject to federal income tax.
T-bills are issued at a discount from the par value, meaning the purchase price is less than the face value of the bill.
Pros and Cons
T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market. T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.
Although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit. Since Treasury bills don't pay periodic interest payments, they're sold at a discounted price to the face value of the bond.
If sold early, there could be a gain or loss depending on where bond prices are trading at the time of the sale. The sale price of the T-bill could be lower than the original purchase price.
Pros
Zero default risk since T-bills have a U.S. government guarantee
T-bills offer a low minimum investment requirement of $100
Interest income is exempt from state and local income taxes but subject to federal income taxes
Investors can buy and sell T-bills with ease in the secondary bond market
Cons
T-bills offer low returns compared with other debt instruments
The T-bill pays no interest payments leading up to its maturity
T-bills can inhibit cash flow for investors who require steady income
T-bills have interest rate risk, so, their rate could become less attractive in a rising-rate environment
Federal Reserve Policy
T-bill prices fluctuate similarly to other debt securities. Many factors can influence prices, including macroeconomic conditions, monetary policy, and supply and demand for Treasuries.
The Federal Reserve monetary policy and the federal funds rate affect T-bills. The rate is the interest rate that banks charge each other for lending them money from their reserve balances on an overnight basis. The Fed increases or decreases this rate to contract or expand the money supply.
| Fed Funds Rate | Yields on Existing Bills | Investors |
|---|---|---|
| Increases | Goes down | Sell Existing T-Bills |
| Decreases | Goes up | Buy Existing T-Bill |
T-bill prices tend to rise when the Fed performs expansionary monetary policy by purchasing Treasuries. Conversely, T-bill prices fall when the Fed sells its debt securities.
How Does Inflation Affect Treasury Bills?
Treasuries also have to compete with inflation, which measures the pace of rising prices. Even if T-bills are the most liquid and safest debt security in the market, fewer investors tend to buy them when the inflation rate is higher than the T-bill return. If an investor buys a T-bill with a 2% yield while inflation is at 3%, the investor would have a net loss on the investment when measured in real terms. As a result, T-bill prices tend to fall during inflationary periods as investors sell them and opt for higher-yielding investments.
Are Treasury Bills the Only Debt Security Issued by the U.S. Treasury?
Treasury bills are one of several types of debt issued by the U.S. Department of the Treasury. Treasury bonds and Treasury notes also represent fixed-term debt. Treasury bills are short-term obligations. Treasury notes are medium-term securities with terms from two to 10 years. Treasury bonds have the longest lifetime and mature in 30 years.
What Type of Interest Payments Are Earned on a Treasury Bill?
The only interest paid will be when the bill matures. At that time, you are given the full face value. T-bills are zero-coupon bonds usually sold at a discount, and the difference between the purchase price and the par amount is your accrued interest.
The Bottom Line
Treasury Bills, or T-bills, represent short-term debt obligations by the Treasury. Because the U.S. government backs them, they are considered extremely low-risk, although they also have relatively low returns.
Article Sources
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TreasuryDirect. "How Treasury Auctions Work."
TreasuryDirect. "Auctions."
TreasuryDirect. "Treasury Bills: Rates & Terms."
U.S. Department of the Treasury. "Daily Treasury Bill Rates."
TreasuryDirect. "Treasury Bills: FAQs."
TreasuryDirect. "Auction Query."
TreasuryDirect. "Treasury Bills in Depth."
TreasuryDirect. "Treasury Bills."
Federal Reserve Bank of San Francisco. "What Is the Fed: Monetary Policy."
Federal Reserve Bank of San Francisco. "What Makes Treasury Bill Rates Rise and Fall? What Effect Does the Economy Have on T-Bill Rates?"
Treasury Direct. "Treasury Bills."
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