What Is a Treasury Bill?
Let me explain what a Treasury bill is. A Treasury bill, or T-bill, is a short-term debt security issued by the U.S. government that matures in less than a year, specifically from four to 52 weeks. You buy them at a discount from their face value, and when they mature, you get the full face amount back—the difference is your return, since they don't pay periodic interest.
These are sold in denominations starting at $100, but you can go up to $10 million in non-competitive bids. The Treasury uses auctions with both competitive and non-competitive bidding to sell them.
Key Takeaways on Treasury Bills
Here's what you need to know right away. T-bills come in $100 denominations up to $10 million, bought at a discount with the full face value paid at maturity. You can get them electronically through TreasuryDirect without fees, or via a broker with a small charge. Remember, the interest is taxed federally but not at state or local levels, which is a big plus if you're in a high-tax area.
How to Buy Treasury Bills
If you're looking to buy T-bills, the government issues them to fund operations, and you can hold them until maturity or sell early. I recommend buying directly from TreasuryDirect to avoid fees, but brokers work too. Start by gathering your Social Security number or TIN, a U.S. address, and your bank details for payments.
Go to TreasuryDirect.gov. If you don't have an account, pick your account type—individual, business, etc.—and enter your info. Set up a username and password, then verify everything. Once logged in, hit 'Buy Direct,' choose T-bills, pick the amount, review, and submit. You'll get a confirmation on-screen and by email, with payment settling the next day and maturity proceeds going straight to your account.
Treasury Bill Rates and Influences
T-bills come in maturities like four, six, eight, 13, 17, 26, and 52 weeks. When rates are expected to rise, longer ones pay more; if falling, they might pay less. Prices go up when the Fed buys Treasurys in expansionary policy, and down when it sells.
Federal Reserve policy directly impacts this through the federal funds rate, which affects money supply. If the fed funds rate increases, yields on existing T-bills go up, prompting investors to sell; if it decreases, yields drop, and people buy more.
Redemptions and Interest
T-bills are issued below par, so at maturity, you get the full value, and the difference is your interest. For instance, if you buy a $1,000 52-week T-bill for about $954, you get $1,000 back, earning around $46 in interest. No regular payments here—it's all in the discount. That interest is federally taxable but skips state and local taxes.
Pros and Cons of T-Bills
Let's weigh the good and bad. On the plus side, there's zero default risk thanks to the U.S. government backing, low entry at $100, tax exemptions on state and local levels, and easy trading in the secondary market.
Drawbacks include lower returns than other debts, no ongoing interest payments, potential cash flow issues if you need steady income, and interest rate risk where rising rates make your T-bill less appealing. If you sell early, you might lose money depending on market prices.
Example of Investing in a T-Bill
- Say you want a $1,000 one-year T-bill at 5% yield: You'd pay around $950 upfront.
- At maturity, you receive $1,000, earning $50.
- That gives an effective yield of about 5.26% on your $950 investment.
Inflation and Other Factors
Inflation hurts T-bills—if yields are 2% but inflation is 3%, you're losing in real terms, so prices drop as investors chase better options. T-bills compete with other Treasurys like notes (2-10 years), bonds (20-30 years), and TIPS that adjust for inflation.
Are Treasury Bills a Good Investment?
It depends on you. They're ultra-safe, backed by the government, great for preserving capital and liquidity with low risk. But yields are low and might not beat inflation long-term. T-bills aren't the only Treasury debt—there are notes, bonds, and TIPS too. Interest only comes at maturity as the discount difference.
The Bottom Line
In summary, T-bills are short-term, safe U.S. government debts sold at a discount, maturing at face value for your interest. They're ideal if you want security and short-term parking for cash.
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