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Treasury Bill (T-Bill)

How Treasury Bills Work

T-bills are the simplest Treasury security. There’s no coupon to track, no semiannual payments to manage. You buy at a discount, wait for maturity, and collect the full par value.

Example: You buy a 26-week T-bill with a face value of $10,000 for $9,750. After six months, you receive $10,000. Your profit is $250, which translates to an annualized yield of roughly 5.1%.

The U.S. Treasury auctions T-bills on a regular schedule:

At auction, the price is determined by competitive bidding from institutional investors. Retail investors can submit noncompetitive bids — you accept whatever yield the auction produces — through TreasuryDirect.gov or a brokerage. The minimum purchase is just $100.

How T-Bill Pricing Works

Since T-bills pay no coupon, their return comes entirely from the discount. The key formulas:

The discount yield is the convention used in T-bill quotes and auction results. It uses a 360-day year and the face value as the denominator. The bond equivalent yield (BEY) is more useful for comparing T-bills against coupon-paying bonds because it uses 365 days and your actual purchase price as the base.

T-Bills vs. Other Treasury Securities

Why Investors Use T-Bills

Capital preservation: With virtually zero default risk and minimal price fluctuation, T-bills are the go-to for parking cash safely. They’re the closest thing to a risk-free investment.

Cash management: Corporations, money market funds, and institutional investors use T-bills to earn a return on short-term cash reserves without taking meaningful risk.

The “risk-free rate”: In finance, the short-term T-bill yield (typically the 3-month) is used as the risk-free rate in models like the Sharpe ratio and the Capital Asset Pricing Model. It’s the baseline return you can earn with essentially no risk.

Yield curve anchor: T-bill yields form the short end of the yield curve. When T-bill yields exceed long-term Treasury yields, you have an inverted yield curve — a historically reliable recession signal.

Risks of Treasury Bills

T-bills are among the lowest-risk investments available, but they’re not completely risk-free in every sense:

Reinvestment risk: This is the main concern. When your T-bill matures, you may have to reinvest at a lower rate if yields have fallen. This is especially relevant during Fed rate-cutting cycles.

Inflation risk: If inflation exceeds the T-bill yield, your real return is negative. During 2021-2022, for example, inflation ran well above T-bill rates, eroding purchasing power.

Opportunity cost: T-bills offer lower yields than longer-duration Treasuries, corporate bonds, or equities over time. The trade-off for safety is accepting a lower return.

Interest rate risk: Essentially negligible for T-bills held to maturity. Even if you sell early, price fluctuations on a 13-week bill are tiny compared to a 30-year T-bond.

Tax Treatment

T-bill income is taxed as ordinary income at the federal level, but is exempt from state and local income taxes — the same treatment as all Treasury securities. The income is recognized in the year the T-bill matures (or when you sell it), not when you purchase it.

This state-tax exemption can make T-bills more attractive than bank CDs or money market funds for investors in high-tax states.

How to Buy Treasury Bills

TreasuryDirect.gov: Buy directly at auction with a noncompetitive bid. $100 minimum, no commissions. Ideal for straightforward buy-and-hold.

Brokerage account: Buy at auction or on the secondary market through Fidelity, Schwab, Vanguard, or any major broker. Gives you more flexibility and the ability to sell before maturity.

Money market funds: Many government money market funds hold primarily T-bills. You don’t own the bills directly, but you get T-bill-like yields with daily liquidity. Check the fund’s expense ratio to make sure it’s not eating into your return.