How to Buy Treasury Bills

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.

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-bills in 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.

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.

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.

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.

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.

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.