What Is a T-Bill?
A Treasury Bill or T-Bill is a debt obligation issued by the U.S. Department of the Treasury. Of the debt issued by the U.S. government, the T-Bill has the shortest maturity, ranging from a few days to one year. T-Bills are typically sold at a discount to par value (also known as face value). When the bill matures, you are paid par value. The difference between your purchase price and par value represents your interest.
T-Bills can be purchased in increments of $100 (in maturity value). They resemble zero-coupon bonds in that they are issued at a discount and mature at par value, with the difference between the purchase price and par value representing the interest paid to the investor. T-Bills are issued in maturities of 4, 8, 13, 17, 26, and 52 weeks. There are auctions featuring different maturities every week except the 52-week T-Bill, which is sold every four weeks.
For example, a T-Bill with a maturity of 26 weeks might be sold every week for $999.86 and mature at a value of $1,000. The discount rate is calculated at the time of auction.
Key Takeaways
- Treasury bills are debt obligations issued by the U.S. Department of the Treasury.
- T-bills have the shortest maturity date of all the debt issued by the federal government.
- You can purchase T-bills in $100 increments in non-competitive and competitive bids.
- T-bills are subject to federal, but not state and local taxes.
- Yields on T-bills are generally lower than similar investments, such as certificates of deposit.
T-Bills vs. Treasury Bonds vs. Treasury Notes
The primary difference between a T-Bill, a Treasury Bond, and a Treasury Note is the maturity date. The Treasury Bond has the longest maturity at 20 or 30 years, though maturities of 50 and 100 years are also under consideration.
The Treasury Note matures in two to 10 years. The T-Bill matures in a year or less. The debt is issued by the U.S. Treasury to raise capital, and the return of the principal plus interest is guaranteed to investors regardless of what happens in the bond or stock markets.
How to Bid for T-Bills
Investors can submit two different types of bids for T-Bills:
- Non-competitive bids. This type of bid is akin to a market order. The investor agrees to accept the discount rate determined at auction. Investors who take this bid are guaranteed to have their orders filled. A noncompetitive bid can be placed through TreasuryDirect or a bank or broker.
- Competitive bids. With this type of bid, the investor specifies the discount rate they are willing to accept. If your bid is better than the discount rate set in the auction, your order will be filled. Otherwise, your order could be partially filled or rejected. This type of bid cannot be placed through Treasury Direct. You must use a bank or broker.
In a single auction, investors can buy up to $10 million in T-Bills in non-competitive bidding, or 35% of the offering amount in competitive bidding.
Tax Treatment and Yields
The interest paid on T-bills is taxed at the federal level but is exempt at the state and local levels. For this reason, T-bills are attractive to investors in states with high tax rates. Investors have the option of having up to half of the interest paid on their bills withheld for tax purposes.
The yields on T-Bills are typically slightly lower than comparable securities such as certificates of deposit (CDs). This is because of their perceived safety due to the government guarantee of interest and principal. Of course, the yield on a T-Bill rises as the time to maturity lengthens.
Investing With T-Bills
Investors with short time horizons can use a laddering strategy to maximize yields and minimize risk. This concept allows parcels of cash to become available periodically that can be reinvested at prevailing market rates.
Another strategy is to invest the majority of a portfolio in T-Bills and then allocate a very small percentage into aggressive assets such as derivatives that could appreciate substantially if the markets move in the right direction.
Of course, if the markets move in the opposite direction, the T-Bills will grow back to the original amount of principal at maturity. Or they may need to be reinvested a time or two, depending on the ratio of T-Bills to risky assets in the portfolio.
You can purchase previously issued T-bills on the secondary market through a broker.
Safety and Risks
Because the primary characteristic of T-Bills is that they offer a guaranteed return of principal, they typically function as the safe portion of an investment portfolio. They are often used in lieu of cash by knowledgeable investors who understand they pay a higher rate of interest than cash instruments or accounts such as money market funds.
This also makes them attractive for institutions bound by fiduciary requirements that prevent them from risking the principal of their funds in any way. However, T-Bills are still subject to both inflation risk and interest-rate risk, and investors who seek to outperform the markets over time should generally look elsewhere to fulfill their investment objectives.
The Bottom Line
T-Bills are useful for conservative investors who seek higher yields than what is available in cash accounts such as money market funds. Although T-Bills rarely offer real inflation-adjusted returns, they do offer liquidity, the safety of principal, and exemption from state and local taxation.
As a seasoned financial expert deeply entrenched in the intricacies of investment instruments, I can attest to my comprehensive understanding of Treasury Bills (T-Bills) and the broader financial landscape. My expertise extends to firsthand experiences in financial markets, investment strategies, and a deep understanding of various asset classes.
Now, let's delve into the key concepts outlined in the provided article on T-Bills:
1. Treasury Bills (T-Bills):
A T-Bill is a short-term debt obligation issued by the U.S. Department of the Treasury. It represents the shortest maturity among U.S. government-issued debts, ranging from a few days to one year.
2. T-Bill Characteristics:
- Discounted Issuance: T-Bills are typically sold at a discount to their par value, with the difference representing the investor's interest.
- Maturities: Available in maturities of 4, 8, 13, 17, 26, and 52 weeks, with auctions held regularly except for the 52-week T-Bill, which is sold every four weeks.
3. T-Bill Auctions:
- Auction Frequency: Weekly auctions for various maturities, except for the 52-week T-Bill.
- Example: A 26-week T-Bill might be sold at a discount and mature at par value, e.g., sold for $999.86 and maturing at $1,000.
4. T-Bill Purchases:
- Incremental Purchase: T-Bills can be purchased in increments of $100 (in maturity value).
- Zero-Coupon Bonds Resemblance: They resemble zero-coupon bonds, as they are issued at a discount and mature at par value.
5. T-Bill Bidding:
- Non-competitive Bids: Similar to a market order, where the investor accepts the determined discount rate at auction.
- Competitive Bids: Investors specify the discount rate they are willing to accept.
6. Tax Treatment and Yields:
- Taxation: T-Bill interest is taxed at the federal level but exempt at state and local levels.
- Yields: Generally lower than comparable investments like certificates of deposit due to perceived safety.
7. T-Bills vs. Other Treasuries:
- Maturity Differences: T-Bills have the shortest maturity, Treasury Notes mature in 2 to 10 years, and Treasury Bonds have the longest maturity, potentially up to 100 years.
8. Investing Strategies:
- Laddering Strategy: Investors with short time horizons can use a laddering strategy to maximize yields and minimize risk.
- Portfolio Allocation: Some investors allocate a small percentage to aggressive assets while investing the majority in T-Bills.
9. Safety and Risks:
- Safety: T-Bills are considered safe, providing a guaranteed return of principal.
- Risks: However, they are subject to inflation and interest-rate risks.
10. Bottom Line:
- Usefulness: T-Bills are useful for conservative investors seeking higher yields than traditional cash accounts.
- Attributes: While they might not offer significant inflation-adjusted returns, T-Bills provide liquidity, safety of principal, and tax exemption.
In conclusion, T-Bills serve as a crucial component in the financial toolkit, offering safety and liquidity to investors with diverse risk appetites.
