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.
One of the distinct advantages of Treasury Bills is the safety and security they provide for investors. However, this security comes at a price, as the yield on treasury bills is often quite low.
Treasury bills are some of the safest investments you can buy. Since they're issued for four, eight, 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. That being said, some of the nation's largest brokers continue to offer T-bills at a zero-commission rate. 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 receive an interest payment, and you have to pay federal income tax on it.
- TreasuryDirect.gov: Treasury Bills
- Bankrate: The Rise and Fall of CD Yields
- Charles Schwab: Certificates of Deposit
- MacroTrends: 1 Year Treasury Rate - 54 Year Historical Chart
- St Louis Fed: Economic Research
- St Lous Fed: Moody's Seasoned Aaa Corporate Bond Yield
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- TreasuryDirect. "Treasury Bills: Rates & Terms." Accessed Aug. 1, 2020.
- U.S. Department of the Treasury. "Daily Treasury Bill Rates Data." Accessed Aug. 1, 2020.
- TreasuryDirect. "Treasury Bills." Accessed Aug. 1, 2020.
- TreasuryDirect. "Auctions." Accessed Aug. 1, 2020.
- Corporate Finance Institute. "Treasury Bills (T-Bills)." Accessed Aug. 1, 2020.
- The New York Times. "The Fed Goes All In With Unlimited Bond-Buying Plan." Accessed Aug. 1, 2020.
- Federal Reserve Bank of San Francisco. "What makes Treasury bill rates rise and fall? What effect does the economy have on T-Bill rates?" Accessed Aug. 1, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.