What Are Treasury Bills? A Beginner’s Guide

Treasury bills can turn a known sum invested today into a scheduled dollar repayment within a year. Their short terms make them useful to understand when comparing places to hold money for upcoming expenses.

The details still matter: an annualized yield is not the return earned in a few weeks, and a marketable security is not necessarily cash available immediately. This guide builds on our explanations of bond yield and bond ladders to explain how Treasury bills work.

What Are Treasury Bills?

Treasury bills, or T-bills, are short-term debt securities issued by the US Treasury. Regular issues mature in periods ranging from four to 52 weeks. They are electronic securities, despite the word “bill.”

TreasuryDirect explains that bills are sold at a discount or at face value, with face value paid at maturity. A conventional discounted bill earns interest through the difference between its purchase price and repayment amount.

Unlike Treasury notes and bonds, bills do not make periodic coupon payments. The investor receives the scheduled maturity payment rather than a series of semiannual interest payments.

A Simple Purchase Example

Suppose an investor pays $9,900 for a hypothetical 13-week bill with a $10,000 face value. After 91 days, Treasury repays $10,000, assuming the obligation is met. The $100 difference is interest earned over that holding period.

The holding-period return is $100 divided by $9,900, or approximately 1.01%. It is not $100 divided by $10,000 when measuring the return on the money actually invested.

All figures here are illustrative, not current auction quotes. They exclude dealing costs and taxes and assume the bill is bought at issue and held until maturity.

Why Annualized Yield Figures Differ

To compare investments with different terms, a yield is often expressed as an annual rate. Annualization does not mean a three-month investment will pay a full year’s interest.

Using simple 365-day annualization, the example’s 1.01% holding-period return becomes approximately 4.05%: divide $100 by $9,900 and multiply by 365 divided by 91.

A bank-discount quote instead uses face value and a 360-day year. For the same example, $100 divided by $10,000, multiplied by 360 divided by 91, is approximately 3.96%.

Treasury’s pricing explanation shows the discount-rate formula. The two percentages describe the same assumed cash flows under different conventions. Neither guarantees the rate available when the proceeds are reinvested.

Buying at Auction or in the Secondary Market

Investors can buy new bills at auction through TreasuryDirect or participating banks, brokers, and dealers. TreasuryDirect accepts noncompetitive bids: the buyer agrees to accept the auction-determined rate rather than specifying a rate that might not be accepted.

Treasury’s buying guide states that marketable securities have a $100 minimum auction bid, in $100 increments. A scheduled TreasuryDirect purchase does not lock in an advertised yield before the auction occurs.

Through a broker, an investor may also buy an outstanding bill in the secondary market. Its remaining maturity can differ from the original issue term, and the price reflects the market at the time of purchase.

Check the security’s actual maturity date, settlement date, purchase amount, and quoted yield. Any commissions, markups, or account fees belong in the comparison.

Accessing the Money Before Maturity

A bill held through a broker can generally be offered for sale before maturity. The proceeds depend on the bid available, transaction costs, and settlement timing. A contractual maturity value does not guarantee the same amount on an earlier sale date.

TreasuryDirect does not sell securities for account holders. Its selling rules require transferring a security to a bank, broker, or dealer before sale.

New TreasuryDirect purchases generally have a 45-day holding period before transfer or sale, with specific rules for reinvestments. A four-week bill therefore matures before that ordinary holding period ends. Investors should check the applicable transfer procedure before assuming early access will be straightforward.

Reinvestment and a Bill Ladder

A short maturity returns money sooner but also brings the next investment decision closer. If yields fall, replacing a matured bill can produce less interest than the previous purchase.

Staggering maturity dates can spread those decisions across time. For example, different holdings can mature in successive months so that only part of a portfolio needs to be reinvested at once.

Our ladder guide explains this structure. If a repayment is needed for spending, it cannot simultaneously remain invested in the ladder. Principal repayments and investment earnings should be budgeted separately.

Risks That Short Maturities Do Not Remove

Treasury bills are obligations of the US government, rather than claims on a corporate borrower. Their short terms generally reduce sensitivity to interest-rate changes compared with longer fixed-rate securities, but an early sale still exposes the holder to market pricing.

Inflation can reduce the purchasing power of the maturity payment. A positive nominal return is not necessarily a positive return after inflation. Treasury bills do not have the principal adjustment described in our TIPS guide.

Currency matters too: an investor measuring wealth in another currency can gain or lose through exchange-rate movements. Access procedures, payment timing, and the possibility of delayed government payments should also be considered when matching a bill to a non-negotiable spending deadline.

Bills, Bank Deposits and Money Market Funds

A Treasury bill is a security, a savings account is a bank deposit, and a money market fund is an investment fund. They can all play roles in cash management, but their access arrangements and protections differ.

The SEC’s cash-sweep bulletin explains that money market funds may hold Treasury bills but do not have FDIC deposit insurance. Eligible deposits at insured banks have deposit protection subject to applicable limits and conditions.

For a fund, review expenses, holdings, yield methodology, and redemption arrangements. Owning fund shares does not give each investor a personal bill maturity date or a guaranteed repayment of the original investment.

Taxes and a Practical Comparison

Direct Treasury-bill interest is subject to US federal income tax and exempt from state and local income taxes. The treatment of an investor’s account, an early-sale gain or loss, or a fund distribution requires its own review.

Start a comparison with the date the money is needed. Then match the maturity, calculate the actual purchase cost and expected repayment, identify the yield convention, and examine access before maturity.

A bill is easiest to evaluate as a specific payment schedule. The useful question is whether that schedule, after relevant costs and taxes, fits the purpose of the money being set aside.