What Are Treasury Bills (T-Bills), and Should You Invest? - SmartAsset (2024)

When you’re looking for a safe way to invest your money, things don’t typically get anymore solidthan government-backed securities. The U.S. Department of the Treasury offers several different low-risk options, including notes, bonds and bills. Treasury bills, or T-bills, can be appealing because you’re not required to tie up your money for a long period. However, they’re not necessarily right for every kind of investor. You may want to consult with afinancial advisor,who can advise you about T-bills, stocks and other types of investments.

How Treasury Bills Work

Treasury bills are short-term securities, which means they come with shorter maturity dates than bonds and notes.Certain types of T-bills have a maturity period of just a few days, but they’re typically issued in terms of four, eight, 13, 26 or 52 weeks.

T-bills are assigned a specific face value, such as $1,000, $5,000 or $10,000, but you can usually purchase them for less than that. The amount you pay is called the discount rate. Once the securities mature, the government hands over the full amount of the bill.

Here’s an example of how the process works. Let’s say you purchase a $10,000 T-bill with a discount rate of 3% that matures after 52 weeks. That means you pay $9,700 for the T-bill upfront. Once the year is up, you get back your initial investment plus another $300.

If you’re interested in investing in T-bills, make sure you aren’t looking at treasury bonds or treasury notes. While T-bills mature at four, 8, 13, 26 or 52 weeks, T-bonds and T-notes have longer maturity times. Notes mature between two and 10 years while bonds mature at 30 years.

T-Bill Tax Considerations

The interest income that you may receive from investing in a treasury bill is exempt from any state or local income taxes, regardless of the state where you file your taxes. However, you will need to report interest income from these investments on your federal tax return. This makes treasury bills partially but not fully tax-exempt.

Every year the investor will receive a Form 1099-INT from the Department of the Treasury, detailing how much interest was earned from all government securities that you’ve invested in throughout the year. You will be taxed at your own marginal rate on your tax return.

Treasury Bonds vs. Treasury Notes vs. Treasury Bills

Treasury bills are not the same thing as treasury bonds or treasury notes, even though they are all government-issued securities. As we covered earlier, both of those investments have longer maturity rates while T-bills mature in less than a year. Other than maturity dates, though, let’s take a closer look at what each type of treasury investment looks like.

  • Treasury Bonds:T-bonds are often referred to as long bonds due to their maturity date of 20 to 30 years. These have the longest maturity date of any government-issued security and because of that they typically carry the highest interest that you can earn. If you purchase a T-bond, you’ll receive a fixed interest payment every six months.
  • Treasury Notes:T-notes are similar to T-bonds but have a maturity of two to 10 years. This security generally comes with a bi-annual interest payment but offers lower yields than a T-bond. The 10-year T-note is a sought-after investment because it is often used as a safe haven to reduce risk in an investment portfolio. Because of its popularity, that same note is looked at as a benchmark to help set mortgage rates.
  • Treasury Bills:T-bills are issued with maturity dates offour, eight, 13, 26, or 52 weeks. Unlike the other two investments, T-bills do not pay interest payments to the investor since the maturity dates are so short. Also unlike the other two facilities that are auctioned off at $100 increments, treasury bills are auctioned off at a discount to their face value.

All three treasury investments have very low default risk because they’re backed by the federal government.

Benefits of Investing in Treasury Bills

What Are Treasury Bills (T-Bills), and Should You Invest? - SmartAsset (2)

The No. 1 advantage that T-bills offer relativeto other investments is the fact that there’s virtually zero risk that you’ll lose your initial investment. The government backs these securities so there’s much less need to worry that you couldlose money in the deal compared to other investments.

Another benefit is that T-bills can be purchased in smaller amounts than many other investments. This means they’re more accessible to someone who doesn’t have a lot of cash to invest. If you only have $1,000 to invest, you can use it to purchase a T-bill and earn a better return on your money than you would if you put it in a regular savings account.

The fact that youcan pick a short maturity termis another plus if you prefer to have some flexibility with your investments. A longer maturity term couldyield a bigger return, but you can still earn some interestif you opt for a shorter term and you can get your money back to reinvest fairly quickly.

Drawbacks of Investing in Treasury Bills

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.

Another potential issue for investors has to do with how T-bills are purchased. You have to bid on them through an auction process. Bidding can be competitive or non-competitive. With the former, you have to choose your discount rate and you might not be able to purchase the bills you want.

Bottom Line

What Are Treasury Bills (T-Bills), and Should You Invest? - SmartAsset (3)

Treasury bills won’t necessarily make you rich. However, they can be a good way to add some conservative investments to your portfolio to counteract other riskier ones. The time period you’re looking to invest into a government-backed investment could be the deciding factor in investing in T-bills over T-bonds or T-notes. The decision to invest should be determined by the investment strategy of your entire portfolio.

Tips for Investing Your Money

  • Investing in government-backed securities can be a strong conservative investment for your portfolio, but you may want to speak to a financial advisor to be sure which one is right for you.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • T-bills probably shouldn’t be the only thing you invest in. You’ll likely want to diversify your portfolio with things like stocks, bonds and exchange-traded funds (ETFs). To get a sense of how your investments should be divided up, use SmartAsset’s asset allocation calculator.

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What Are Treasury Bills (T-Bills), and Should You Invest? - SmartAsset (2024)

FAQs

What Are Treasury Bills (T-Bills), and Should You Invest? - SmartAsset? ›

Treasury bills, or T-bills, are a straightforward, short-term investment option, maturing in one year or less. Investors purchase them at a cost below their face value, and when the bond reaches maturity, the U.S. government repays the full face value.

Why people don t invest in Treasury bill? ›

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.

What is the disadvantage of investing in Treasury bills? ›

T-bills are issued with maturities of only a few weeks to a few months. This means that investors looking for longer-term investments may need alternative options. If interest rates rise, the value of T-bills will decline, resulting in a potential loss for investors who need to sell their holdings before maturity.

Are Treasury bills good for retirees? ›

Investors Near or in Retirement

A portfolio that includes Treasury bonds, bills, or notes, provides safety and helps to preserve their savings since Treasuries are considered risk-free investments. With their consistent interest payments, T-bonds can offer an ideal income stream after the employment paychecks cease.

Is it worth investing in T-bills? ›

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

Are T-bills better than CDs? ›

Liquidity: CDs are not liquid accounts; the money is locked until the CD's maturity date, or you'll have to pay hefty penalties. T-bills provide more liquidity; they can be sold if you need cash fast.

What happens when a T-bill matures? ›

When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

Can Treasury bills lose value? ›

Like Treasury bonds and notes, T-bills have no default risk since they're backed by the U.S. government.

How much does a $1000 T-bill cost? ›

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.

What is a better investment than Treasury bills? ›

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.

Why would anyone buy Treasury bills? ›

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.

Do you have to pay taxes on Treasury bills? ›

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.

How much tax do you pay on Treasury bills? ›

Each month, the T-bill ETF distributes taxable income to its shareholders, reflecting interest harvested from the short-term Treasuries it owns. Those earnings are taxable at the ordinary income tax rate that applies to salary, as much as 37%.

Does Buffett buy T-bills? ›

It's no secret that Warren Buffett, the billionaire CEO of Berkshire Hathaway, loves treasury bills, also known as T-bills. While he could invest Berkshire Hathaway's massive cash hoard of over $100 billion in nearly anything, for the time being, he's sticking with T-bills.

What is the biggest advantage of investing in T-Bill? ›

The single biggest advantage of purchasing T-bills is that they are more or less free from market risk. * Because they are backed by the US government, the default risk for these investments is close to zero.

How do T-bills work for dummies? ›

Treasury bills, or bills, are typically issued at a discount from the par amount (also called face value). For example, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86 ($1,000 x . 99986111 = $999.86111). * When the bill matures, you would be paid its face value, $1,000.

Why not to buy Treasury bonds? ›

So, the risks to investing in T-bonds are opportunity risks. That is, the investor might have gotten a better return elsewhere, and only time will tell. The dangers lie in three areas: inflation, interest rate risk, and opportunity costs.

Do rich people buy Treasury bills? ›

Some millionaires keep their cash in Treasury bills that they keep rolling over and reinvesting. They liquidate them when they need the cash. Treasury bills are short-term notes issued by the U.S government to raise money. Treasury bills are usually purchased at a discount.

Why do investors purchase T-bills instead of a government bond? ›

Their short-term nature and high liquidity make Treasury bills appealing to some investors. Since these investments are often viewed as relatively safe, demand is generally consistent.

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