What are Treasury Bills?

A Treasury bill, or T-bill, is a bit like an IOU from a friend who’s short on cash for lunch...

Your hungry friend promises to pay you $10 next week if you pay for his $8.50 hamburger today – This is kind of like purchasing a T-bill for a discount rate and receiving a promise from the government that it will pay you more for it (aka, a higher face value amount) later.

There are three types of fixed income (set maturity or interest rates that do not fluctuate) securities offered by the US. Treasury:

1. Treasury bills (T-bills) & Cash Management Bills
2. Treasury notes (T-notes)
3. Treasury bonds (T-bonds)

There are two main differences between Treasury bills (T-bills), treasury notes, and treasury bonds: Interest and maturity dates. A T-bill does not make periodic interest payments (only pays the face value when the bill reaches maturity), and it matures in one year or less. A subtype of a T-bill is a cash management bill, which tends to have an extremely short maturity time (often a few days) and earns interest similar to a T-bill.

Treasury notes (T-notes) tend to offer longer maturity lengths of between two and 10 years and pay interest every six months.

Treasury bonds (T-bonds) provide the most extended maturity, at 30 years, and also pay interest semiannually. For both options that pay interest (T-notes and T-bonds), there are no interest payments after they reach maturity.

Treasury bills are sold at a discount value to investors at an assumed (aka imputed) rate rather than offering those investors an interest payment at set intervals. This raises short term capital for the government to fund a variety of needs. Treasury bills (T-bills) sold at auction are sold for an amount less than the par (or face) amount.

Non-competitive bid purchases have the option of being made through a broker, bank, or Treasurydirect.com (the online purchase and management site for Treasury securities run by the Treasury Department). Those prices are set at each auction before the investor makes an offer to purchase.

To make a competitive bid purchase, an investor must use a bank or broker –- And he or she isn’t guaranteed to be successful in buying T-bills at any specific bid amount. When the T-bill matures (at one year or less) the purchaser is paid the full face value of the T-bill.

T-bills can also be sold on the secondary bond market instead of waiting for maturity. A broker or bank typically handles secondary bond market sales, and there are waiting limits for T-bills purchased through Treasurydirect.com before they can be sold in this manner.

Redemption for the full par value is handled through Treasurydirect.com or through the broker/bank through which the investor purchased the T-bill. The redemption process may vary slightly from broker to broker, but if you bought a T-bill through Treasurydirect.com, the redemption is automatic. The site also offers an option to reinvest the proceeds of maturing T-bills in new T-bill purchases.

Treasury bills (T-bills) are sold in an auction through the US Treasury at treasurydirect.com, with the assistance of banks and brokers - Or, they’re sold on the secondary bond market. Auctions, both competitive and non-competitive, are the standard method for purchasing T-bills.

T-bill auctions are generally held weekly by the US Treasury online using the Treasury Automated Auction Processing System (TAAPS). They are not held at a physical location that can be visited. Instead, buyers can participate in non-competitive auctions by creating a Treasurydirect.com account. Previously, Legacy Treasury Direct was the online purchasing option for T-bills. However, the Treasury Department is replacing it with TreasuryDirect.com for online purchasing and management of T-bills and other Treasury securities.

For competitive auction bids, buyers need to work through a bank or broker (who bid through TAAPS) to place bids and make purchases. When working through a bank or broker, the process for buying may vary slightly for each entity’s internal process system.

T-bill availability at each auction varies. Most maturity options for T-bills are offered at weekly auctions. However, 52-week maturity T-bills are only offered once every four weeks. Treasury notes and Treasury bonds have further reduced offering schedules. Cash management bills, a subset of T-bills, are only offered periodically.

Each auction cycle, a non-competitive bid amount will be specified, and the equivalent interest percentage will be listed. Bids for that amount will be accepted (within the rules of the auction). Buyers may decide to accept the non-competitive offered price or make a competitive bid (with no guarantee of acceptance of the bid). T-bills available in competitive bidding are limited to 35% of the total available in each auction. Bid acceptance is not determined until the end of the auction, and bids are accepted from lowest to highest up to the non-competitive pricing. Each purchase is limited to $5M via non-competitive auction or 35% of the offered securities in each auction, and T-bills are usually offered in $100 increments with a $100 minimum purchase.

Once a T-bill is purchased, a buyer may hold it until it matures, or sell it on the secondary bond market. There is a waiting period before certain T-bills can be sold in this manner. Certain exchange-traded funds (aka ETFs) also include T-bills in their investments.

Treasury bills (T-bills) pay for a variety of items within the federal budget, such as:

• Shortfalls in general funding
• Raising capital for specific infrastructure projects
• Paying the national debt

There are many things T-bills pay for within the federal budget, because T-bills can be a flexible way for the government to raise short term capital. They are not offered in the same quantities at each auction, and are instead offered based on need.

T-bills can also be used by the Fed to adjust currency supply as part of monetary policy. When the Fed buys back T-bills and other Treasury instruments, more funds can become available for banks to loan to investors, companies, and the general public. When these groups have more funds to spend, it can help fuel increased financial activity, and at enough scale, affect the economy.

A wide variety of items influences treasury bill (T-bill) prices and vary with time and situation.

Some things that can affect T-bill pricing are:

• Federal Reserve monetary policy
• Current market conditions (such as bull or bear markets)
• The time to maturity for the T-bill
• Current inflation rates
• The risk tolerance of investors
• Supply/demand levels

Competitive bidding also influences pricing on the non-competitive bid auction, so even the mood of a significant individual investor could affect pricing at any given time. T-bill pricing tends to run close to the Federal Reserve’s interest rate, the Fed Funds Rate, except when a rise in rates makes other investments more attractive. When that happens, the drop in demand for the T-bills has more influence on pricing than the Fed Funds Rate.

No single investment is always a good or bad investment for everyone. However, there are important points you can consider when deciding whether or not T-bills are a good choice for you at a particular time.

T-bills can enjoy some tax advantages, because they’re exempt from both state and local income tax. However, T-bills are subject to federal income tax.

Maturity times can be very low for T-bills, so they are considered a liquid investment that does not require tying up funds for long periods of time. Plus, they may be sold on the secondary bond market for even faster liquidity. (Please note that selling treasury securities before their stated maturity date will subject the seller to potential capital gains or losses.)

Because the Federal government backs T-bills, they are considered a low-risk investment. However, they have lower rates of return, as is common with many low-risk investments.

As with any investment, it can be a good or a poor choice, depending on your situation. Advice from a licensed financial advisor is recommended before making any investment decision.