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What Is Treasury Bills?

Treasury bills, commonly known as T-bills, are short-term debt instruments issued by the U.S. Department of the Treasury. They are a fundamental component of the broader category of fixed-income securities and represent one of the safest investments available, backed by the full faith and credit of the U.S. government. Unlike bonds or notes, Treasury bills do not pay periodic interest rate payments (coupons). Instead, they are sold at a discount from their face value and mature at par, with the investor's return being the difference between the purchase price and the face value received at maturity. Treasury bills have maturities of one year or less, typically ranging from 4, 8, 13, 17, 26, or 52 weeks. They play a crucial role in the money market and are a key tool for the government to manage its short-term borrowing needs.

History and Origin

The introduction of Treasury bills marked a significant evolution in U.S. government finance. Prior to 1929, the U.S. Treasury primarily relied on fixed-price offerings of coupon-bearing certificates of indebtedness, notes, and bonds for its debt and cash management. This system had several drawbacks, including the underpricing of new securities, infrequent issuance schedules leading to inefficient cash management, and potential volatility in overnight interest rates due to reliance on short-term loans from Federal Reserve Banks.⁷

To address these inefficiencies, President Herbert Hoover signed legislation on June 17, 1929, allowing the Treasury to begin offering Treasury bills.⁶ This shift introduced an auction mechanism, leading to pricing that was more aligned with prevailing market rates.⁵ The systematic auctioning of Treasury bills became regular in the early 1930s, proving instrumental in financing government operations during the Great Depression. Over time, the types and maturities of T-bills have evolved; for instance, 4-week bills were introduced in 2001, and more recently, 6-week bills were added in 2025.⁴

Key Takeaways

• Treasury bills are short-term U.S. government debt securities with maturities of one year or less.
• They are sold at a discount and mature at their face value, with the profit being the difference between the purchase price and the face value.
• T-bills are considered among the safest investments due to being backed by the full faith and credit of the U.S. government.
• They are a highly liquid investment, frequently used by investors to park funds temporarily or for diversification within a portfolio.
• Treasury bills are auctioned regularly by the U.S. Department of the Treasury through a competitive bidding process.

Formula and Calculation

The return on a Treasury bill is typically expressed as a discount yield (also known as bank discount yield). This yield is calculated based on the discount from the face value, annualized for a 360-day year.

The formula for the bank discount yield ((Y_d)) is:

Where:

• Face Value: The par value of the Treasury bill, which is the amount the investor receives at maturity.
• Purchase Price: The price at which the investor buys the Treasury bill in the auction.
• 360: The number of days used for annualizing the yield in the bank discount method (a convention, not 365).
• Days to Maturity: The number of days remaining until the Treasury bill matures.

While the bank discount yield is commonly quoted, investors often calculate the investment rate (or bond equivalent yield) to compare it with other investment opportunities that are based on a 365-day year and coupon payments. The investment rate ((Y_i)) can be approximated as:

The yield calculated for Treasury bills directly reflects the short-term interest rates in the economy.

Interpreting the Treasury Bills

Interpreting Treasury bills primarily involves understanding their yield and how it reflects market conditions and investor sentiment. The lower the purchase price relative to the face value, the higher the discount yield, indicating a higher return for the investor. Conversely, a higher purchase price means a lower yield.

Since Treasury bills are considered virtually risk-free from a credit perspective, their yields serve as a benchmark for other short-term debt instruments and market interest rates. A rising T-bill yield often signals that the market expects short-term interest rates to increase, or that the market is demanding a higher return for lending to the government due to factors like rising inflation expectations or increased supply of government debt. Conversely, falling T-bill yields can indicate expectations of lower interest rates or a flight to safety during economic uncertainty. Their high liquidity means they can be easily bought and sold, providing flexibility for investors.

Hypothetical Example

Suppose an investor wants to purchase a 13-week (91-day) Treasury bill with a face value of $10,000. In the auction, the investor's successful bid results in a purchase price of $9,900.

1. Calculate the Discount Amount:
   Discount Amount = Face Value - Purchase Price
   Discount Amount = $10,000 - $9,900 = $100

2. Calculate the Bank Discount Yield:

   $$Y_d = \frac{\$100}{\$10,000} \times \frac{360}{91}$$ $$Y_d = 0.01 \times 3.956 \approx 0.03956 \text{ or } 3.96\%$$

3. Calculate the Investment Rate (Bond Equivalent Yield):

   $$Y_i = \frac{\$100}{\$9,900} \times \frac{365}{91}$$ $$Y_i = 0.0101 \times 4.011 \approx 0.04051 \text{ or } 4.05\%$$

In this example, the investor effectively earns $100 on an initial investment of $9,900 over 91 days. The bank discount yield is approximately 3.96%, while the investment rate is approximately 4.05%, providing a more comparable yield to other investments.

Practical Applications

Treasury bills are widely used by a diverse range of investors and institutions for various purposes:

• Cash Management: Corporations and institutions frequently use Treasury bills to manage their short-term cash reserves, as they offer a secure place to park funds while earning a modest return. The predictable nature of T-bill returns makes them ideal for short-term financial planning.
• Safe-Haven Investment: During periods of economic uncertainty or market volatility, investors often flock to Treasury bills as a safe haven due to their perceived lack of credit risk. This "flight to safety" can drive down T-bill yields.
• Monetary Policy Tool: The Federal Reserve utilizes the Treasury bill market as part of its open market operations to influence short-term interest rates and manage the money supply.
• Benchmark for Short-Term Rates: The yields on Treasury bills are often used as a benchmark for pricing other short-term financial instruments, such as commercial paper and certificates of deposit.
• Auctions: The U.S. Department of the Treasury conducts regular auctions to issue new Treasury bills, which are critical for financing government operations.³ These auctions are accessible to institutional investors, primary dealers, and individual investors via TreasuryDirect.

Limitations and Criticisms

While Treasury bills are highly regarded for their safety and liquidity, they do have limitations and are subject to certain criticisms:

• Low Yields: Due to their exceptionally low risk, Treasury bills typically offer lower yields compared to other marketable securities like corporate bonds or equities. This makes them less attractive for investors seeking higher returns over the long term, especially during periods of low interest rates.
• Inflation Risk: The primary risk associated with Treasury bills is inflation risk. If inflation rises unexpectedly during the holding period, the purchasing power of the fixed return from the T-bill can erode, leading to a negative real return. This risk is amplified for longer-term fixed-income investments, but even short-term T-bills are not entirely immune if inflation spikes rapidly.²
• Opportunity Cost: Investing heavily in Treasury bills, especially during periods of economic growth, can mean missing out on potentially higher returns from other asset classes, such as stocks or longer-term bonds. This is known as opportunity cost.
• Reinvestment Risk: For investors who frequently roll over their Treasury bill investments, there is a risk that future auction yields may be lower, leading to reduced returns over time.

Treasury Bills vs. Treasury Bonds

Treasury bills are often confused with other types of U.S. government debt, particularly Treasury bonds and Treasury notes. The key distinguishing factor is their original maturity and how they pay interest.

While Treasury bills are short-term, zero-coupon instruments, Treasury notes and Treasury bonds are coupon-bearing securities with longer maturities, providing regular interest payments to investors. The choice between these instruments depends on an investor's time horizon, liquidity needs, and risk tolerance.

FAQs

How do I buy Treasury bills?

Individual investors can purchase Treasury bills directly from the U.S. Department of the Treasury through its TreasuryDirect website. Alternatively, they can buy T-bills through a bank, broker, or financial advisor, though this may involve additional fees. The process involves participating in weekly or bi-weekly auctions for newly issued bills.

Are Treasury bills taxable?

Yes, the income earned from Treasury bills (the difference between the purchase price and face value) is subject to federal income tax. However, it is exempt from state and local income taxes. This tax treatment can make them attractive to investors in high-tax states.

What happens if I need to sell a Treasury bill before maturity?

Treasury bills are highly liquid and can be sold in the secondary market before their maturity date. The selling price will depend on prevailing market interest rates at the time of sale. If interest rates have risen since purchase, the selling price may be lower than your purchase price, potentially resulting in a loss. Conversely, if rates have fallen, you might sell it for a profit.

Why are Treasury bills considered so safe?

Treasury bills are considered one of the safest investments because they are backed by the "full faith and credit" of the U.S. government. This means the government guarantees to pay back the principal at maturity. The risk of default is considered negligible, making them a preferred choice for investors prioritizing capital preservation over higher returns. This strong backing minimizes credit risk.

Do Treasury bills offer a good return?

The "goodness" of a Treasury bill's yield is relative. Historically, T-bills offer lower returns compared to other investments like stocks or corporate bonds, reflecting their low risk. Their primary benefit is capital preservation and liquidity rather than aggressive growth. In a low-interest-rate environment, their returns may be very modest, but in a high-interest-rate environment, they can offer competitive short-term income without significant risk.
The U.S. Department of the Treasury plays a central role in managing the nation's finances, including issuing these securities.¹