A Treasury bill is a short-term bond issued by the US Treasury. When you buy one, you're lending money to the government to help finance the national debt. In exchange for the use of your money for a short time, the government will pay you interest. Typically, T-bills are considered very safe, but they aren't the highest paying investments available.
Treasury bills are some of the safest investments you can buy. Since they're issued for four, 13, 26 or 52 weeks, you probably aren't going to own them long enough for inflation to have a chance to significantly erode their value. At the same time, the law requires the Treasury to pay them back. Furthermore, since the Treasury can print its own money, there's essentially no chance that you won't be paid back.
Favorable Tax Treatment
Unfortunately, the interest you earn on T-bills is subject to Federal income tax, unless you buy them in a tax-advantaged account such as a Roth IRA. However, they're exempt from state and local income tax. If you live in a state with relatively high taxes, this can help to increase the effective return you earn from your T-bills, making them a superior investment to, for instance, certificates of deposit.
Low Transaction Cost
Although you can buy T-bills from a broker or dealer, you may have to pay a commission. Alternately, you can purchase T-bills directly from the Treasury through their Treasury Direct program. Buying from the Treasury is fee- and commission-free. When your T-bills mature, you can turn them in and get your initial investment and your return back, also without incurring fees or commissions.
Low Rates of Return
Given their safety, T-bills offer relatively low yields. Between 1976 and 2012, the average rate of return on a one-year T-bill was 5.83 percent and 5.17 percent on a three-month T-bill. For comparison, a three-month CD's return averaged 5.82 percent while AAA-rated corporate bonds paid an average annual rate of return of 8.07 percent. From 2008 through 2012, three-month and one-year Treasuries paid 0.36 and 0.54 percent, compared to 0.88 and 4.84 percent for three-month CDs and corporate bonds.
One of the T-Bill's biggest advantages is also one of its biggest drawbacks. You constantly have to turn them over into new investments since they mature so quickly. This means that if you have a T-Bill paying a good rate of interest and rates drop, you'll end up reinvesting and making less money. At the same time, every time the bond matures, you realize a gain from the interest being paid, and have to pay federal income tax on it.