What Are Treasury Bills?

What Are Treasury Bills?

Treasury bills are investments that are backed by the federal government. That means the risk of default is extremely low. The U.S. Department of the Treasury sells debt securities to raise money to fund various projects and initiatives. By purchasing a Treasury security, you're essentially loaning money to the U.S. government.

If you buy a T-bill, you'll receive an interest payment when the term ends. Treasury bills are available through TreasuryDirect.gov with maturities of four, six, eight, 13, 17, 26 and 52 weeks. The minimum purchase amount is $100, and Treasury bills are available in $100 increments.

You can also buy T-bills through a bank or investment broker. That may be a financial advisor, brokerage firm or robo-advisor that can buy and sell investments for you. But this comes with a fee, and some may have higher minimum purchase amounts for T-bills—sometimes as much as $1,000.

Learn more: What Are Fixed Income Investments?

How Do Treasury Bills Work?

A Treasury bill's face value is what it's worth at the time it's issued. When you purchase a T-bill, which happens via auction, you'll pay a discounted price. Auctions occur every four weeks for 1-year Treasury bills. For shorter-term T-bills, auctions are held weekly. When the bill matures, you'll receive the difference between the face value and the amount you paid.

You can calculate a T-bill's annual return using the formula below. That can help you decide whether it's a good fit for your investment portfolio.

You'll multiply the final result by 100 to see your annual return. Let's say you purchase an 8-week T-bill. The face value is $1,000, but you get it at a discount and pay $985. Using the math above, your annual return would be about 9.9%.

Treasury Bills Example

Let's go back to the example above. In this case, the $985 purchase price will be automatically withdrawn from your linked bank account. You can expect to see the new T-bill in your TreasuryDirect account within one week of the auction date. After eight weeks, when the bill matures, you'll receive a $1,000 automatic deposit. That puts your final return at $15.

Treasury Bills vs. Bonds vs. Notes

Treasury bills are just one type of low-risk government bond. You can also explore Treasury bonds and Treasury notes, which work a little differently. Treasury bonds have long-term investment timelines and pay interest every six months. Treasury notes are similar, but have slightly shorter maturity periods.

Learn more: When to Invest in Treasury Bills vs. Bonds

Treasury Bills vs. HYSAs vs. CDs

T-bills are distinct from high-yield savings accounts (HYSAs) and certificates of deposit (CDs). Each one can allow you to earn interest with very little risk, but they're different when it comes to liquidity and earning potential.

Are Treasury Bills Taxable?

Treasury bills, bonds and notes receive similar tax treatment. With all three types of government bonds, interest is taxed at the federal level but exempt from state and local taxes.

That's different from municipal bonds, which are issued by states, counties and cities. These returns are shielded from federal taxes, as well as state taxes in most cases. But if you purchase a corporate bond, you can expect gains to be taxed at both the federal and state level.

Pros and Cons of Treasury Bills

Like any other investment, Treasury bills have potential benefits and drawbacks. Consider the following before adding them to your portfolio.

How to Buy Treasury Bills

If T-bills sound like a good fit for your investment portfolio, you can take the following steps to buy them directly from the U.S. Department of the Treasury:

• Create a TreasuryDirect.gov account. It's relatively easy to create a free account and link it to your bank account to make purchases and receive payments.
• Search for T-bills. You can also search for Treasury bonds and notes, as well as Treasury Inflation-Protected Securities (TIPS) and savings bonds.
• Choose an auction and bid. You should see upcoming auction dates for T-bills. You can select a date and term length that works for you, then enter your bid in increments of $100. The lowest amount you can bid through TreasuryDirect.gov is $100, but investment brokers may have higher minimums.
• Finalize the sale. After submitting your bid, you can use your linked bank account to pay for your T-bill.

Tip: You can schedule reinvestment of your T-bill when you purchase your Treasury bill or up to four days before it matures.

Frequently Asked Questions

The Bottom Line

Treasury bills offer a low-risk way to net a guaranteed return. They're easy to purchase, and the federal government will back up your investment. While returns are modest, T-bills could help round out your portfolio and provide steady income—which could be especially valuable in retirement. Whether T-bills are right for you will depend on your goals, timeline and risk tolerance.