A Treasury Bill or T-Bill is a debt obligation issued by the U.S. Department of the Treasury. Of the debt issued by the U.S. government, the T-Bill has the shortest maturity, ranging from a few days to one year. T-Bills are typically sold at a discount to par value (also known as face value). When the bill matures, you are paid par value. The difference between your purchase price and par value represents your interest.
T-Bills can be purchased in increments of $100 (in maturity value). They resemble zero-coupon bonds in that they are issued at a discount and mature at par value, with the difference between the purchase price and par value representing the interest paid to the investor. T-Bills are issued in maturities of 4, 8, 13, 17, 26, and 52 weeks. There are auctions featuring different maturities every week except the 52-week T-Bill, which is sold every four weeks.
For example, a T-Bill with a maturity of 26 weeks might be sold every week for $999.86 and mature at a value of $1,000. The discount rate is calculated at the time of auction.
Key Takeaways
Treasury bills are debt obligations issued by the U.S. Department of the Treasury.
T-bills have the shortest maturity date of all the debt issued by the federal government.
You can purchase T-bills in $100 increments in non-competitive and competitive bids.
T-bills are subject to federal, but not state and local taxes.
Yields on T-bills are generally lower than similar investments, such as certificates of deposit.
The primary difference between a T-Bill, a Treasury Bond, and a Treasury Note is the maturity date. The Treasury Bond has the longest maturity at 20 or 30 years, though maturities of 50 and 100 years are also under consideration.
The Treasury Note matures in two to 10 years. The T-Bill matures in a year or less. The debt is issued by the U.S. Treasury to raise capital, and the return of the principal plus interest is guaranteed to investors regardless of what happens in the bond or stock markets.
How to Bid for T-Bills
Investors can submit two different types of bids for T-Bills:
Non-competitive bids. This type of bid is akin to a market order. The investor agrees to accept the discount rate determined at auction. Investors who take this bid are guaranteed to have their orders filled. A noncompetitive bid can be placed through TreasuryDirect or a bank or broker.
Competitive bids.With this type of bid, the investor specifies the discount rate they are willing to accept. If your bid is better than the discount rate set in the auction, your order will be filled. Otherwise, your order could be partially filled or rejected. This type of bid cannot be placed through Treasury Direct. You must use a bank or broker.
In a single auction, investors can buy up to $10 million in T-Bills in non-competitive bidding, or 35% of the offering amount in competitive bidding.
Tax Treatment and Yields
The interest paid on T-bills is taxed at the federal level but is exempt at the state and local levels. For this reason, T-bills are attractive to investors in states with high tax rates. Investors have the option of having up to half of the interest paid on their bills withheld for tax purposes.
The yields on T-Bills are typically slightly lower than comparable securities such as certificates of deposit (CDs). This is because of their perceived safety due to the government guarantee of interest and principal. Of course, the yield on a T-Bill rises as the time to maturity lengthens.
Investing With T-Bills
Investors with short time horizons can use a laddering strategy to maximize yields and minimize risk. This concept allows parcels of cash to become available periodically that can be reinvested at prevailing market rates.
Another strategy is to invest the majority of a portfolio in T-Bills and then allocate a very small percentage into aggressive assets such as derivatives that could appreciate substantially if the markets move in the right direction.
Of course, if the markets move in the opposite direction, the T-Bills will grow back to the original amount of principal at maturity. Or they may need to be reinvested a time or two, depending on the ratio of T-Bills to risky assets in the portfolio.
You can purchase previously issued T-bills on the secondary market through a broker using the latest bid/ask prices.
Safety and Risks
Because the primary characteristic of T-Bills is that they offer a guaranteed return of principal, they typically function as the safe portion of an investment portfolio. They are often used in lieu of cash by knowledgeable investors who understand they pay a higher rate of interest than cash instruments or accounts such as money market funds.
This also makes them attractive for institutions bound by fiduciary requirements that prevent them from risking the principal of their funds in any way. However, T-Bills are still subject to both inflation risk and interest-rate risk, and investors who seek to outperform the markets over time should generally look elsewhere to fulfill their investment objectives.
The Bottom Line
T-Bills are useful for conservative investors who seek higher yields than what is available in cash accounts such as money market funds. Although T-Bills rarely offer real inflation-adjusted returns, they do offer liquidity, the safety of principal, and exemption from state and local taxation.
A Treasury Bill or T-Bill is a debt obligation issued by the U.S. Department of the Treasury. Of the debt issued by the U.S. government, the T-Bill has the shortest maturity, ranging from a few days to one year. T-Bills are typically sold at a discount to par value (also known as face value).
, are short-term debt obligations issued by the U.S. Treasury
U.S. Treasury
The on-the-run bond or note is the most frequently traded Treasury security of its maturity. Because on-the-run issues are the most liquid, they typically trade at a slight premium and thus yield a little less than their off-the-run counterparts.
Department. They are considered safe investments because they are backed by the full faith and credit of the U.S. government. T-bills are sold at a discount from their face value and mature at face value.
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.
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.
A treasury bill is a short-term financial instrument issued by the government. Because they're backed by a country's own treasury, they're considered a low-risk investment and the investor runs very little chance of losing money.
Buffett favors three-month and six-month T-bills. Bid/ask spreads are tight—usually just a penny, or equivalent to one basis point in yield, or a hundredth of a percentage point. Fees are low, at about a tenth of a percentage point annually. There is very little price volatility due to the short maturities of T-bills.
If you're saving for a goal less than a year away: If you're saving money for a goal with a short-time horizon, T-bills can make more sense than CDs. They provide a higher APY than savings accounts, and they're more liquid than CDs.
Key Takeaways. Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT.
A Treasury bill (T-bill) is a short-term debt obligation backed by the U.S. Department of the Treasury with a one-year maturity or less. Treasury bills are usually sold in denominations of $100 and can reach a maximum denomination of $10 million.
The only interest payment to you occurs when your bill matures. At that time, you are paid the par amount (also called face value) of the bill. (Bills are typically sold at a discount from the par amount, and the difference between the purchase price and the par amount is your interest.)
Treasury bonds, Treasury notes, or Treasury bills sold before their maturity date could mean a loss, depending on bond prices at the time of the sale. Simply put, the face value is only guaranteed if the Treasury is held until maturity.
Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.
Treasury bonds—also called T-bonds—are long-term debt obligations that mature in terms of 20 or 30 years. They're essentially the opposite of T-bills as they're the longest-term and typically the highest-yielding among T-bills, T-bonds, and Treasury notes.
You can only buy T-bills in electronic form, either from a brokerage firm or directly from the government at TreasuryDirect.gov. (You can also buy Series I savings bonds through TreasuryDirect.gov). The most common maturity dates are four weeks, eight weeks, 13 weeks, 26 weeks and 52 weeks.
We sell Treasury Bills (Bills) for terms ranging from four weeks to 52 weeks. Bills are sold at a discount or at par (face value). When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
The only interest payment to you occurs when your bill matures. At that time, you are paid the par amount (also called face value) of the bill. (Bills are typically sold at a discount from the par amount, and the difference between the purchase price and the par amount is your interest.)
To calculate yield, subtract the bill's purchase price from its face value and then divide the result by the bill's purchase price. Finally, multiply your answer by 100 to convert it to a percentage.
Basic Info. 3 Month Treasury Rate is at 5.29%, compared to 5.37% the previous market day and 5.54% last year. This is higher than the long term average of 2.73%. The 3 Month Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 3 months.
Are Treasury bills taxed as capital gains? Normally no. However, if you buy a T-bill in the secondary market and then achieve a profit, you may be liable for capital gains depending on your exact purchase price.
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