What’s a Treasury bill?

Treasury bills, also known as T-bills, are U.S. short-term debt securities that the federal government issues. They mature in four weeks to one-year. They are considered lower-risk investments because they are backed by the U.S. government. These securities are distinguished from other Treasury-issued securities by their shorter maturity terms.

T-bills can be purchased in increments up to $100 (upto $10 million) with a variety of maturities. Most common terms are for 4, 8, 13, 17, 26, and 52 weeks.

How Treasury bills function

Treasury bills have a face value, or par value. This is the amount of the bill if it is held until maturity. The discount price is a price that is lower than par and you can profit from the difference at term’s end. The “interest” earned is the difference between the discounted price and the par value. It’s that simple. You gave the government a short term loan by purchasing T-bills and they paid you back with interest at the end.

How do I buy Treasury bills

Treasury bills can be purchased directly at TreasuryDirect.gov, or through a brokerage account. Treasury Direct is easy to use and available to all who have internet access. They only need a taxpayer identification number (or Social Security number) and an address in the United States. To link for payment, they will also need a savings or checking account.

You can buy T-bills via mutual funds or exchange-traded funds (ETFs) through a brokerage account. Investors often do this. Bundles of T-bill investments can be used to diversify your portfolio and lower risk.

Treasury bills vs. Treasury Notes vs. Treasury Bonds

There are three types U.S. debt securities: Treasury bills, bonds and notes. They differ in terms of the maturity period (from shortest to longest). Treasury notes are intermediate-term investments which mature in between two and three years, five, seven, seven, seven, and ten years. Treasury bonds mature in between 20 and 30 years. Treasury bonds and Treasury notes pay interest every six month, unlike T-bills.

Are Treasury Bills a Good Investment?

The final decision about whether Treasury bills will work for you depends on your financial goals, your risk tolerance, and your time horizon.

Since the U.S. government guarantees T-bills, they are considered low-risk investments for short-term investment. Federal taxes are due on all income, but there is no state or local tax.

The returns on Treasury bills are lower than those of other debt securities or certificates of deposit. Conservative investors, who are more willing to take on risks but still want to earn some interest, may find Treasury bills most attractive.

Why do Treasury bill rates fall?

Remember that Treasury bill rates can be affected by economic growth, inflation and interest rates. Here’s how it works.

If the discount rate offered is not in line with inflation, T-bill demand can drop during inflationary periods.

The Federal Reserve sets the lending rates between banks. The Federal Reserve can either lower or increase the interest rate to encourage lending, as well as the rate at which the economy is contracted. Investors tend to choose higher-yield investments options over lower-yield Treasury bills when interest rates are high.