Bill

What Is a Treasury Bill?

A Treasury bill, commonly known as a T-bill, is a short-term debt obligation issued by the U.S. government with a maturity of one year or less. These instruments are a fundamental component of Fixed Income Securities and serve as a primary means for the U.S. Department of the Treasury to finance the nation's ongoing operations and manage its Government Debt. T-bills are considered one of the safest investments available because they are backed by the full faith and credit of the U.S. government. Unlike bonds or notes, T-bills do not pay periodic interest payments; instead, they are sold at a Discount Rate to their face value, and the investor earns the difference between the purchase price and the face value at Maturity Date.

History and Origin

Treasury bills have a long history, with their formal introduction in the United States dating back to 1929. The U.S. Treasury began issuing T-bills as a way to finance the government's short-term borrowing needs, particularly in response to the economic conditions of the Great Depression. Initially, these bills were issued with maturities of up to one year and were sold at a discount to their face value. The process evolved from a fixed-price subscription system to an Auction system, where Treasury bills are sold to the highest bidder, allowing market forces to determine the price. The first T-bill auction took place on December 10, 1929, resulting in the issuance of $224 million in three-month bills. Over the decades, the types and maturities of Treasury bills have expanded, with 4-week bills introduced in 2001, 8-week bills in 2018, and other variations added to meet evolving government financing requirements⁷.

Key Takeaways

• Treasury bills are short-term government debt securities with maturities of one year or less.
• They are sold at a discount to their face value, with the return generated from the difference between the purchase price and the face value at maturity.
• T-bills are considered a low-risk investment due to the backing of the U.S. government.
• The U.S. Department of the Treasury issues T-bills through a weekly auction process.
• They play a crucial role in managing the nation's short-term borrowing needs and influencing short-term Interest Rates.

Formula and Calculation

The return on a Treasury bill is calculated based on its discount rate and the number of days to maturity. The yield on a T-bill is typically expressed as a discount yield, but investors often convert this to a bond-equivalent yield for comparison with other investment products.

The discount yield ((Y_d)) is calculated as:

The bond-equivalent yield ((Y_{be})) provides a comparable annual yield:

Where:

• Face Value = The par value of the Treasury bill at maturity.
• Purchase Price = The price at which the T-bill is purchased at auction.
• Days to Maturity = The number of days remaining until the T-bill matures.

This calculation helps investors understand the effective return on their investment and allows for comparison with other yield-bearing instruments.

Interpreting the Treasury Bill

Interpreting a Treasury bill primarily involves understanding its implied yield and how it compares to prevailing market Interest Rates. Since T-bills are sold at a discount, the lower the purchase price relative to the face value, the higher the effective yield an investor will receive. The yields on T-bills are also crucial indicators for the broader financial market. They often serve as a benchmark for the "risk-free rate," against which the returns of other, riskier investments are measured.

Changes in T-bill yields can reflect shifts in economic expectations, central bank Monetary Policy, and investor demand for safe assets. For instance, a rise in T-bill yields might indicate that investors are demanding higher compensation for holding short-term government debt, perhaps due to concerns about future Inflation or anticipated interest rate hikes by the Federal Reserve.

Hypothetical Example

Suppose an investor purchases a 26-week (182-day) Treasury bill with a face value of $10,000 for a purchase price of $9,850.

1. Calculate the Discount Amount:
   Discount Amount = Face Value - Purchase Price
   Discount Amount = $10,000 - $9,850 = $150

2. Calculate the Discount Yield:
   (Y_d = \frac{$150}{$10,000} \times \frac{360}{182})
   (Y_d \approx 0.015 \times 1.978)
   (Y_d \approx 0.02967), or approximately 2.97%

3. Calculate the Bond-Equivalent Yield:
   (Y_{be} = \frac{$150}{$9,850} \times \frac{365}{182})
   (Y_{be} \approx 0.01522 \times 2.005)
   (Y_{be} \approx 0.03052), or approximately 3.05%

In this example, the investor would earn $150 when the T-bill matures in 26 weeks, translating to a bond-equivalent yield of about 3.05%. This hypothetical scenario illustrates the direct relationship between the purchase price discount and the yield received on the investment. Investors often include T-bills as part of their Portfolio Management strategies.

Practical Applications

Treasury bills are widely used in various facets of finance and investing:

• Cash Management: Corporations, financial institutions, and individual investors often use T-bills for short-term cash management due to their high Liquidity and low risk. They serve as a safe place to park excess funds for brief periods.
• Monetary Policy Implementation: The Federal Reserve utilizes T-bill auctions as a tool for conducting open market operations, influencing the money supply and short-term interest rates as part of its Monetary Policy objectives.
• Benchmark for Short-Term Rates: The yields on Treasury bills are considered a Risk-Free Rate and serve as a benchmark for pricing other short-term financial instruments, such as commercial paper and money market funds. For example, the yield on the 3-month U.S. Treasury bill stood at 4.35% on July 30, 2025⁶.
• Investment Diversification: While low-yielding, T-bills can contribute to Diversification within a portfolio, particularly during periods of market volatility, offering stability and capital preservation.
• Global Reserve Assets: Foreign central banks and governments hold significant amounts of U.S. Treasury bills as part of their foreign exchange reserves due to their safety and liquidity.

The U.S. Department of the Treasury regularly conducts auctions for Treasury bills, notes, and bonds to fund government activities⁵. These auctions are open to both institutional and individual investors, who can place competitive or non-competitive bids.

Limitations and Criticisms

Despite their reputation as a safe investment, Treasury bills are not without limitations:

• Low Returns: T-bills typically offer lower yields compared to other types of securities, especially during periods of low interest rates. This makes them less attractive for investors seeking higher capital appreciation or substantial income.
• Inflation Risk: While T-bills are considered risk-free in terms of credit default, they are susceptible to Inflation risk. If the rate of inflation rises unexpectedly, the real return on a T-bill (the return after accounting for inflation) can be diminished, or even turn negative. Short-term nominal debt instruments, like T-bills, can have their real value reduced by inflation⁴. Investors may demand higher yields to compensate for the potential loss of purchasing power due to inflation³.
• Reinvestment Risk: As T-bills have short maturities, investors frequently need to reinvest their proceeds. If interest rates fall between the time of purchase and maturity, the investor may have to reinvest at a lower yield, leading to reduced overall returns. This is a common consideration in Capital Markets.
• Opportunity Cost: Investing heavily in T-bills may mean missing out on potentially higher returns available from other asset classes, such as stocks or longer-term bonds, during periods of economic growth.

Treasury Bill vs. Treasury Note

Treasury bills (T-bills) and Treasury notes (T-notes) are both debt instruments issued by the U.S. Department of the Treasury, but they differ primarily in their maturity periods and how they pay interest.

The primary point of confusion between a Treasury bill and a Treasury note stems from their similar issuer (the U.S. Treasury) and their role as government debt. However, their distinct Maturity Date and interest payment structures mean they appeal to different investor needs and risk tolerances. T-bills are preferred for short-term liquidity and capital preservation, while T-notes offer a longer investment horizon and regular income streams, affecting their position on the Yield Curve.

FAQs

What is the minimum investment for a Treasury bill?

Treasury bills are typically available in denominations of $100, with a minimum purchase of $100, making them accessible to a wide range of investors².

How often are Treasury bills auctioned?

The U.S. Department of the Treasury conducts regular auctions for Treasury bills, typically on a weekly basis, for various maturities like 4-week, 8-week, 13-week, and 26-week bills¹.

Are Treasury bills taxable?

The income earned from Treasury bills is exempt from state and local income taxes but is subject to federal income tax. This tax treatment is a key consideration for investors in their Portfolio Management.

Can I sell a Treasury bill before its maturity date?

Yes, Treasury bills are highly liquid and can be sold in the secondary market before their Maturity Date. The price received will depend on prevailing market interest rates at the time of sale.