What is a Treasury bill?

What is a Treasury bill?

A Treasury bill, or T-bill, is a short-term loan to the US government. It is sold at a discount and you get face value at maturity. It pays no periodic interest, so price gap is return, near zero default risk.

You buy T-bills in maturities from a few weeks up to a year. The government promises to pay you back, and that promise is backed by its full faith and credit. That is why T-bills are the risk-free yardstick, the benchmark every riskier asset is measured against.

Think of a T-bill as a safe parking spot for cash you may need soon. It earns a little more than a savings account, but your principal stays nearly untouched. The trade-off is a low return, because certainty costs money.

You buy T-bills through TreasuryDirect or a brokerage in fixed denominations, starting at $100 and rising in $100 increments. Small investors and institutions alike step in with the same promise. The low entry bar is part of why T-bills are so easy to use as a safe cash parking spot.

How does a Treasury bill pay you?

A T-bill does not send you interest checks. You buy it at a discount, hold it to maturity, and get the full face value back; every dollar of your return lands at the end. The US government backs the promise, so your principal sits near untouched.

That return moves with interest rates and fear. When rates rise, T-bill yields climb. When investors panic, they pile into T-bills, which keeps yields low. You are trading return for safety, and that trade never disappears.

Why is a Treasury bill considered so safe?

The borrower is the US government, which can raise taxes and print currency to meet its debts. It has never failed to pay on time. That record makes a T-bill as close to default-free as anything on Earth.

That safety is exactly why it pays so little. Investors accept a tiny return for certainty, and that willingness drives the yield down. The low rate is the price of near-certainty.

For cash you must protect, the trade is worth it. Knowing your money will be there, undiminished and on time, is worth more than a few extra percentage points when that money is the difference between riding out a bad patch and being forced into a bad sale.

What is the difference between a T-bill, note, and bond?

The difference is time. A Treasury bill matures in a year or less, making it the shortest and most liquid. A Treasury note runs two to ten years. A Treasury bond runs twenty or thirty years. Longer terms mean more interest-rate risk and typically higher yields.

Longer Treasuries carry real price risk: if rates rise, their value falls, and you could lose principal if you sell early. T-bills, with their short lives, barely face that risk, which is why they are the safest and calmest of the three.

When should you use Treasury bills?

Use T-bills when you need money soon and cannot afford to lose it. An emergency fund, a savings goal within a year, or the cash layer of a portfolio all fit. They earn a little more than a plain savings account and keep your principal essentially safe.

They also work as ballast against market swings. When stocks fall, T-bills hold value and yield, cushioning your portfolio. And while their interest is free of state and local income tax, federal tax is due on it, so you owe the government a slice even of that modest return.

For money you will not touch for years, they are the wrong home. T-bills earn far less than growth assets over time. Reserve them for cash that must be there, no matter what, and let your long-horizon money seek out growth.

How are Treasury bills auctioned and priced?

You buy a T-bill at a discount to face value, and that gap is your return. A $1,000 bill priced at $99.986111 per $100 costs you $999.86. At maturity you collect the full $1,000, so the difference is your entire earned interest.

The discount rate is set at auction, usually every week. A noncompetitive bid accepts whatever rate the auction produces and guarantees you every bill you asked for. A competitive bid names a rate you will accept, and the auction may fill it, fill part, or skip you.

Most T-bills are auctioned every week. The maturities run four, eight, thirteen, twenty-six, and fifty-two weeks, with a handful of in-between terms as well. The one-year bill sells once a month. Cash management bills cover irregular short gaps when the Treasury needs money fast.

Laddering stacks maturities so cash keeps rotating home. You buy bills at four, thirteen, and twenty-six weeks, and as each matures you roll it into a new one for a later date. The result is steady, staggered income instead of one lump return.

You can hold a T-bill to maturity or sell it earlier on the secondary market, and short maturities make the price swing tiny. Whatever happens in rates, your capital moves little over weeks or months. That short horizon is what keeps T-bills calm.

How do Treasury bills compare to money market funds?

You can get similar safety from a money market fund, a mutual fund that pools cash into short-term debt like T-bills, commercial paper, and repurchase agreements. It adds professional management and easy access, but it carries small fees, fluctuates slightly, and lacks the direct government backing a T-bill has.