Treasury Bills (T-Bills): What They Are and How to Invest

What is a T‑Bill?

A Treasury bill (T‑bill) is a short-term U.S. government debt security that matures in one year or less (common maturities: 4, 8, 13, 17, 26, and 52 weeks). T‑bills are zero‑coupon instruments sold at a discount to face value; you receive the full face value at maturity and the difference is your return.

Key takeaways

• Issued by the U.S. Treasury in terms from 4 to 52 weeks.
• Sold at a discount; no periodic interest payments.
• Common minimum purchase is $100 (noncompetitive bids may go much higher).
• Interest is subject to federal tax but exempt from state and local income taxes.
• Available via TreasuryDirect or through brokers and in secondary markets.

How T‑Bills work

• Auctioned by the Treasury using competitive and noncompetitive bids.
• Competitive bidders specify a yield; noncompetitive bidders accept the auction yield and are guaranteed the desired dollar amount.
• At maturity you receive the par (face) value; the purchase discount equals earned interest.
• Prices and yields move with market interest rates and monetary policy.

How to buy T‑Bills

1. Decide whether to buy directly (TreasuryDirect.gov) or through a brokerage.
2. Gather required information: Social Security/TIN, U.S. address, and bank account details.
3. On TreasuryDirect: create and verify an account, choose “Buy Direct,” select the T‑bill term and amount, submit the order.
4. Payment typically settles the next day; at maturity proceeds are deposited to your linked account.
5. Brokers may charge small fees and also allow trading in the secondary market.

Yields, maturities and market behavior

• Shorter maturities generally have lower yields than longer short-term maturities when rates are expected to rise; the reverse can occur when rates are expected to fall.
• T‑bill prices rise when the Federal Reserve eases (buys Treasurys) and fall when the Fed tightens or sells.
• Yields are driven by supply and demand, inflation expectations, and monetary policy.

Redemption and example

T‑bills pay no periodic coupons. Example:
* Face value: $1,000 (1‑year T‑bill)
Hypothetical yield: 5% → purchase price ≈ $950
Maturity value: $1,000 → interest = $50
* Effective yield on invested capital ≈ 5.26% (50 / 950)

Pros and cons

Pros
* Backed by the full faith and credit of the U.S. government — near zero default risk.
Low minimum investment and high liquidity.
Exempt from state and local income taxes.

Cons
* Typically lower returns than many other fixed‑income or equity investments.
No periodic income — interest realized only at maturity.
Vulnerable to interest‑rate risk: existing T‑bills can lag newly issued bills when rates rise.
* Real return can be negative if inflation exceeds the nominal yield.

Federal Reserve policy and macro factors

The federal funds rate and Fed actions strongly influence short‑term Treasury yields. When the Fed raises its policy rate, short‑term yields and rates available in new T‑bill auctions generally increase; when it eases policy, yields tend to fall. Economic conditions, supply of Treasurys, and investor demand for safe assets also affect prices and yields.

Inflation considerations

If inflation outpaces a T‑bill’s yield, the investor’s real (inflation‑adjusted) return is negative. During higher inflation or when investors expect rising rates, demand for low‑yield T‑bills can fall, depressing prices and raising yields.

How T‑Bills compare to other Treasuries

• Treasury bills: short term (≤1 year), zero‑coupon, sold at a discount.
• Treasury notes: medium term (2–10 years), typically pay semiannual coupons.
• Treasury bonds: long term (20–30 years), pay semiannual coupons.
• TIPS: principal adjusts with inflation; coupon payments vary accordingly.

Are T‑Bills a good investment?

T‑bills are appropriate for capital preservation, short‑term cash parking, and risk‑averse investors who value liquidity and safety. They typically offer lower returns than riskier assets and may not keep up with inflation, so they may not suit long‑term growth objectives.

Bottom line

Treasury bills are one of the safest and most liquid short‑term investments, sold at a discount and redeemed at face value. They work well for preserving capital and managing short‑term cash needs, but their low yields and inflation exposure mean they are not a substitute for higher‑return investments when long‑term growth is the goal.

Sources

TreasuryDirect (U.S. Department of the Treasury); Federal Reserve materials on monetary policy and short‑term rates.