However, there are important points you can consider when deciding whether or not T-bills are a good choice for you at a particular time. A wide variety of items influences treasury bill (T-bill) prices and vary with time and situation. The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website.

Federal Reserve Policy

T-bills are issued at a discount from the par value, also known as the face value. While the stock market plunge hurt millions of Americans’ retirement savings, the turmoil in the bond market creates very real pressures on the nation’s finances. what is treasury bills Because the Treasury Department pays interest to debt holders, any increase in yields puts more financial strain on the nation’s coffers. Canadian treasury bills are similar to US ones – they are also fully guaranteed by the federal government. However, Canadian T-bills offer highly attractive rates of interest. Players in the financial markets closely watch treasury bill yields, which impact the yields on corporate and municipal bonds, as well as bank interest rates.

• This concept allows parcels of cash to become available periodically that can be reinvested at prevailing market rates.
• A rising federal funds rate tends to draw money away from Treasuries and into higher-yielding investments.
• These are the safest investment instrument of its category, as the risk of default is negligible.

An increase in bond yields could add to that expense, putting even more pressure on the federal budget. In 2024, the U.S. spent more than $1 trillion to service its debt, more than double its roughly $500 billion in 2020, according to Treasury data. That’s largely due to higher interest rates engineered by the Federal Reserve to battle the post-pandemic surge in inflation.

The main difference between Treasury bills, Treasury notes, and Treasury bonds is the length of maturity. For Treasury bills, you can expect them to mature within a year (but again, you can buy them with much shorter maturity dates). Treasury bonds currently mature between 20 and 30 years, but maturity lengths of 50 to 100 years have been proposed. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

What is a Treasury Bill Vs Bond?

A Zero Coupon Treasury bill is a type of government security that does not pay interest payments. Instead, it is issued at a discount to its face value, and the investor receives the full face value at maturity. For example, you may buy a $1,000 zero-coupon T-Bill at a $950 purchase price. 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. You can also buy T-bills through a bank, online brokerage or other financial institution.

When that happens, the drop in demand for the T-bills has more influence on pricing than the Fed Funds Rate. Each auction cycle, a non-competitive bid amount will be specified, and the equivalent interest percentage will be listed. Bids for that amount will be accepted (within the rules of the auction). Buyers may decide to accept the non-competitive offered price or make a competitive bid (with no guarantee of acceptance of the bid). T-bills available in competitive bidding are limited to 35% of the total available in each auction.

Treasury bills from TreasuryDirect.gov

These short-term debt instruments are issued at a discounted price, but while redeeming, investors get at par value. Treasury Bills are considered a safe investment as the sum collected is not invested in the stock market. The government uses these funds for welfare schemes, capital project financing, operating expenses, and other financial obligations. The Federal Reserve is also one of the largest purchasers of government debt securities. When the Federal Reserve purchases U.S. government bonds, bond prices rise while the money supply increases throughout the economy as sellers receive funds to spend or invest.

During periods of economic uncertainty or instability, investors often flock to the relative safety of Treasury bills, leading to an increase in demand and a consequent decrease in yield (or rate). There are many things T-bills pay for within the federal budget, because T-bills can be a flexible way for the government to raise short term capital. They are not offered in the same quantities at each auction, and are instead offered based on need. To make a competitive bid purchase, an investor must use a bank or broker –- And he or she isn’t guaranteed to be successful in buying T-bills at any specific bid amount. When the T-bill matures (at one year or less) the purchaser is paid the full face value of the T-bill.

Treasury bills vs. notes & bonds

Earnings are calculated as the difference between the purchase price and the face value at maturity. However, earnings on T-bills are exempt from taxes at the state and local levels, making them an attractive investment for individuals in high-tax cities or states. If sold early, there could be a gain or loss depending on where bond prices are trading at the time of the sale. The sale price of the T-bill could be lower than the original purchase price. Federal Reserve is engaged in an expansionary monetary policy by purchasing Treasurys. Conversely, T-bill prices fall when the Fed sells its debt securities.

Investment Strategies for the Long Term That Work

Treasury notes (T-notes) tend to offer longer maturity lengths of between two and 10 years and pay interest every six months. These are the safest investment instrument of its category, as the risk of default is negligible. Further, the date of issue is predetermined, as well as the amount is also fixed.

• They can be an excellent choice for preserving capital and generating steady, albeit modest, returns.
• Treasury bills (T-bills) sold at auction are sold for an amount less than the par (or face) amount.
• When working through a bank or broker, the process for buying may vary slightly for each entity’s internal process system.
• Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.
• If you’re looking for a low-risk investment with a decent rate of return in the short term, a Treasury bill may be exactly what you need.

Suppose you purchased a 26 week Treasury note (T-bill) at a non-competitive auction. The par value (face value) is stated as $1,000, and you paid a discounted rate of $950. At the end of 26 weeks, at maturity, the T-bill would be worth $1,000. The T-bill could then be reinvested or redeemed through either TreasuryDirect or the broker or bank you used to make the purchase. T-Bills don’t pay regular interest but are issued at a discount (i.e., a reduced value) and redeemed at their par value on maturity.

Although there is no state or local tax on your gains, there is a federal tax that will be due, so that’s important to keep in mind. Treasury bills are generally sold at online auctions in increments of $100. They don’t pay interest directly, and instead offer a discount to the buyer, who is then able to cash them in at maturity for the full face value.

Rising market interest rates make the fixed-rate T-bills less attractive. A Treasury Bill (T-Bill) is a short-term debt obligation backed by the U.S. Treasury bills are usually sold in denominations of $1,000 while some can reach a maximum denomination of $5 million on noncompetitive bids.

Treasury bills are assigned a par value (or face value), which the bill is worth if held throughout the term. You buy bills at a discount — a price below par — and profit from the difference at the end of the term. The most common terms for T-bills are four, eight, 13, 17, 26 and 52 weeks. However, their low-risk nature also means they generally provide lower yields than other investments and potentially will not keep pace with inflation over time.

All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy. 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.