Economy 101: Treasury Bills
Many people looking for a safe, short-term place to invest their money choose U.S. Treasury Bills, or T-Bills. These are highly liquid (short-term) government securities issued by the U.S. Department of the Treasury, typically for terms of four weeks, three months, six months or one year.
Essentially, T-Bills are a means for the government to raise money from the public. They are issued in denominations of $100 and up to a maximum of $5 million in government securities may be purchased at a single auction. They are fully backed by the credit of the U.S. government and thus are considered essentially risk-free.
Like other low-risk investments, such as savings accounts and certificates of deposit (CDs), T-Bills often earn relatively low interest; unlike with those other options, however, interest earned by a T-Bill is not subject to state or local taxes, although it is subject to federal income tax.
When you buy a T-Bill, you pay less than its par (face) value. Then, when it matures, you receive the full par value. For example, to buy a three-month, $1,000 T-Bill that earns 2.04% interest you would pay $980 upfront. Then, after three months, you would be paid $1,000. Thus, you earn $20 on your $980 investment, or 2.04% ($20/$980 = 2.04%)
You can sell a T-Bill before its maturity date without penalty, although you will be charged a commission. (With CDs, you pay a sizeable penalty for early withdrawals.)
How to purchase Treasury Bills
You can buy T-Bills through either a noncompetitive or a competitive bidding process at regularly held auctions. You can either buy them directly from the U.S. Treasury (see www.treasurydirect.gov for instructions on how to open an account) or through a bank, stock broker or dealer.
- With a noncompetitive bid, you agree to accept whatever discount rate is determined at the auction. This guarantees you will receive the T-Bill amounts you wanted.
- With a competitive bid, you specify the discount rate you are willing to accept; however, this won’t guarantee that you receive T-Bills in the amounts you wanted, if at all.
Note that although non-competitive bids may be made either through the Treasury or a bank, broker or dealer, competitive bids cannot be made directly with the Treasury – you must use a bank, broker or dealer for those transactions.
Also, there are no fees charged when T-Bills are ordered directly from the government, so it’s a good idea to discuss any commissions or other transaction fees when ordering though a bank, broker or dealer.
Longer-term government securities are known as Treasury Notes (mature in two to 10 years) and Treasury Bonds (mature in 10 to 30 years). They pay interest semi-annually, as opposed to at the end of the term, as with T-Bills.
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