Treasury Bills: A Beginner’s Guide to T-Bills
T-bills are short-term U.S. debt securities. They are currently paying around 4% and are considered a risk-free investment if held to maturity.
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What is a Treasury bill?
Treasury bills (T-bills) are short-term U.S. debt securities issued by the federal government that mature in four weeks to one year. This shorter maturity period differentiates them from other Treasury-issued securities. Because the U.S. government backs T-bills, they're considered virtually risk-free if held for the entire term.
The most common terms for T-bills are four, eight, 13, 17, 26 and 52 weeks. They are typically sold in $100 increments and can be purchased online from the Treasury Department, a brokerage or a bank
How Treasury bills work
Treasury bills are assigned a par value (or face value), which the bill is worth if held throughout the term. You buy bills at a discount — a price below par. Once the term ends, or reaches maturity, you receive the face value. It's as simple as that — you gave the government a short-term loan by buying T-bills, and they paid you back with "interest" at the end of the term.
How T-bills differ from Treasury bonds and notes
Treasury bills, notes and bonds are three types of U.S. debt securities that mainly differ in maturity (shortest to longest). Treasury notes are intermediate-term investments that mature in two, three, five, seven and 10 years. Treasury bonds mature in 20 or 30 years.
Treasury notes and Treasury bonds pay interest every six months. Treasury bills don't pay a fixed interest rate. Instead, they are sold at a discount rate to their face value. The “interest” you receive (so to speak) is the difference between the face value of the bill and its discount rate when it matures.
» To explore how this works in practice, check out our Treasuries calculator.
How to buy Treasury bills
T-bills are now only available in electronic form. You can buy Treasury bills directly from the government at TreasuryDirect.gov, through a brokerage account, via bond funds, or through certain savings accounts.
Buying Treasury bills from TreasuryDirect
TreasuryDirect is accessible to anyone with internet access, a taxpayer identification number or Social Security number, a U.S. address, and a checking or savings account to link for payment. TreasuryDirect sells Treasury bills by auction, at a discount to their face value. The yield on a Treasury bill is equal to its face value divided by its purchase price, minus 1.
Buying Treasury bills through a brokerage account
Many brokers also offer access to Treasuries if you'd rather have all your investments in one place. Some brokers offer access to new issues (at auction) and to the secondary market as well. As with TreasuryDirect, bills are typically sold at a discount to their face value, and this discount determines the yield an investor will earn by holding a bill to maturity.
Investing in Treasury bills via exchange-traded funds (ETFs)
If you have a brokerage account that doesn't offer individual bonds, you can still invest in Treasury bills via a bond ETF.
The three largest Treasury bill ETFs by assets under management at the time of last update are the iShares 0-3 Month Treasury Bond ETF (SGOV), SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), and the iShares 7-10 Year Treasury Bond ETF.
Since these funds invest in multiple Treasury bills, calculating their yield is a bit complicated. The best place to look for a T-bill fund's yield is on the fund's website; search for the word "yield" on the page.
It's worth keeping in mind that bond funds have expense ratios, and the annual yield you'll actually earn is likely to be the stated yield, minus the expense ratio. However, many Treasury bill funds, including the three listed above, have very low expense ratios (0.15% or less).
Treasury accounts
Some brokerage firms also offer Treasury accounts, a relatively new product that does the work of purchasing T-bills for you, holding them to maturity and then reinvesting the profits. (NerdWallet has a partnership with Atomic Treasury to offer a Treasury account. Public, an online broker we review, also offers a Treasury account.)
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How are Treasury bills taxed?
Investors owe federal taxes on any income earned from Treasury bills, but no state or local tax. This state and local tax exemption applies to bills purchased via TreasuryDirect, a brokerage account, and most Treasury accounts.
In theory, it also applies to Treasury bill funds — but ETF managers in general have broad leeway to choose which assets their funds invest in, and may change their strategy or invest in non-T-bill securities. Make sure you check out a Treasury bill fund's holdings before investing.
What causes Treasury bill rates to fall?
Economic growth or decline, interest rates and inflation can all affect Treasury bill rates. Here's how it works:
Demand for T-bills often drops during inflationary periods if the T-bill rates offered don't keep pace with inflation. When demand falls, T-bill rates often follow.
The federal funds rate — the lending rate between banks — can also affect T-bill prices. When lending interest rates are high, investors tend to look toward more profitable investment options, such as stocks and funds, and away from Treasury bills.
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Are Treasury bills a good investment?
T-bills are known to be low-risk, short-term investments when held to maturity because the U.S. government guarantees them.
Treasury bills typically earn lower returns than other debt securities and even some certificates of deposit. As a result, Treasury bills may be most attractive to conservative investors who want to earn a little interest without the risk of more volatile investments such as individual stocks.
Whether Treasury bills are a good fit for your portfolio depends on your risk tolerance, time horizon and financial goals.
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About T-Bills
About T-Bills