How To Invest In Treasury Bills (2024)

If you’re seeking low-risk investments, your first choice should always be U.S. Treasury securities. Backed by the full faith and credit of the U.S. government, Treasurys are the safest investment asset on earth.

Treasury bills have the shortest maturities of any U.S. government debt securities, making them a great option for short-term investing. Treasury bill yields have risen steadily over the last year, with most maturities now yielding over 5%.

What Are Treasury Bills?

Government debt securities come in a range of different maturities. Treasury bills, commonly referred to as T-bills, offer the briefest maturities of any government debt. U.S. Treasury bills come in terms of four, eight, 13, 26 and 52 weeks.

Unlike other fixed-income securities, like Treasury bonds, T-bills do not provide periodic interest payments. Instead, Treasury bills are sold in at a discount to their face value, or par value.

If you wanted to buy $1,000 in T-bills that were currently yielding 5%, the U.S. Treasury would sell them to you at a discounted price of $950. You would receive $1,000 at maturity, with the additional $50 representing your earned interest.

T-bills are highly liquid investments, meaning they can be easily bought or sold in the secondary market before their maturity. They are actively traded on the open market, making them a flexible investment option.

Treasury Bills vs Treasury Bonds and Treasury Notes

U.S. Treasury bonds and Treasury notes have longer maturities that T-bills. Here’s a look at the differences:

• Treasury Bonds. These long-term Treasury securities carry maturities of 20 to 30 years. As with any bond, the longer the maturity, the greater the risk, the higher the coupon—that’s the interest rate paid by bonds. Bondholders receive interest payments every six months and are paid the face value of the bond at maturity.
• Treasury Notes.These intermediate-term securities offer maturities of two to 10 years. They pay interest twice annually and return the par value at maturity. The 10-year Treasury note is a widely followed financial market benchmark. When people talk about “Treasury yields,” they usually mean the 10-year Treasury yield.
• Treasury Bills.T-bills have short maturities of four, eight, 13, 26 and 52 weeks. Since they offer such short maturities, T-Bills don’t offer interest payment coupons. Instead, they’re called “zero-coupon bonds,” meaning that they’re sold at a discount and the difference between the purchase price and the par value at redemption represents the accrued interest.

T-Bills Are a Safe Investment

Treasury securities are backed by the full faith and credit of the U.S. government. Investment professionals use Treasury yields as the risk-free rate or the rate of return offered by an investment that carries no risk.

The federal government has never defaulted on an obligation, and it’s universally believed it never will. Investors who hold T-bills can rest assured that they will not lose their investment.

T-Bills are considered a zero-risk investment thanks also to Treasury market liquidity. According to the Securities Industry and Financial Markets Association (SIFMA), there is more than $11.2 trillion in U.S. government debt outstanding, with an average daily trading volume of over $633 billion.

With a market of this size and trading volume, investors who want to sell will always be able to find a buyer.

T-Bill Still Have Risks

Investing in T-bills isn’t free of risk. Here are a few risk factors to consider.

• Opportunity Cost. T-bills are considered risk-free because you can be certain you’ll get your money back. But risk and return are directly proportional, and T-bills offer very low returns on investment. Consequently, if you invest in T-bills, there’s a risk you’re foregoing the opportunity to earn a higher return elsewhere.
• Inflation. This is the rate at which the price of goods and services in the economy rises and is perhaps the greatest risk to T-bill investors. Rising inflation erodes the value of interest payments. Inflation can exceed the investment return and eat into the principal’s value. T-bills become less attractive to investors in highly inflationary environments.
• Interest rates. T-bills become less attractive to investors when interest rates rise since they can receive higher interest income elsewhere.
• Market risk. When the economy expands, equity performance benefits and stocks appear less risky. With low returns, T-Bills become less attractive and demand wanes, pushing bond prices down. Conversely, in a more challenging economic environment, T-Bills become more attractive as investors seek a haven.

How to Buy T-Bills

Investors have options when it comes to buying Treasurys. One way to buy T-Bills is to go straight to Uncle Sam and open a TreasuryDirect.gov account. This online platform is the federal government’s main portal through which it can sell bonds. To open an account, you only need a U.S. address, a social security number, and a bank account.

Buy T-Bills at TreasuryDirect

By using TreasuryDirect, investors save money on fees and commissions. It only takes $100 to start investing, and the buyer has two choices.

T-bills are sold via auction, so investors need to place a bid. A competitive bidder specifies the desired rate or yield, while a noncompetitive bidder accepts the going rate established in the auction.

When the auction closes, noncompetitive bidders have their orders filled first. Once all noncompetitive bidders have been satisfied, the competitive bidders are issued securities starting with the lowest bids and moving up.

The U.S. Treasury publishes auction schedules, which list announcement dates, auction dates and settlement dates. Buyers must place their order between the afternoon and the night before the auction date. T-bills with maturities of less than 52 weeks are auctioned weekly, while 52-week issues are auctioned monthly.

A TreasuryDirect account functions just like a brokerage account. When your bid is accepted, your bank account is debited in the amount of the selling price and the T-Bills arrive in your TreasuryDirect account. When the T-bill matures, the par value is automatically credited to your bank account.

Buy T-Bills in a Brokerage Account

For clients of large firms like Fidelity, Vanguard, and Charles Schwab, placing an order through your broker may be easier than opening a separate TreasuryDirect account. These firms charge no fees for T-bills.

Investors who wish to purchase T-bills for individual retirement accounts must go through their broker, as it is not possible to fund an IRA via TreasuryDirect.

Investors can also buy T-bills in the secondary market, although purchasing new issues is generally a wiser option. If you buy bonds in the secondary market, you’ll have to pay the bid/ask spread, an unnecessary cost since auctions are held frequently.

How to Build a Bond Ladder

Bond laddering with Treasury securities can be an interesting strategy for investors who want to manage interest rate risk and create a reliable income stream.

Building a bond ladder involves purchasing bonds of varying maturities and holding them until they mature, with the interest payment offering a predictable income stream during the holding period. At maturity, the bond’s face value is reinvested.

You can build a bond ladder for any period of time, and the staggered reinvestment means that you’ll have flexibility in how you respond to varying interest rate environments.

Since laddering is intended to produce a predictable income stream, it only makes sense to invest in high-quality bonds. While Treasurys may not pay high interest, their rock-solid security ensures predictability.

The Takeaway

While no one gets rich from investing in T-Bills, they’re free from default risk and highly liquid. They can play an important role in a diversified investment portfolio, but it’s important to ensure they fit into your overall investment strategy. It’s always wise to work with a financial advisor to choose the investments most suitable for achieving your long-term financial goals.