Treasury bills offer a simple, low-risk way to earn interest on money you will need within a year. Here is how T-bills work, how to buy them and when they may outperform a savings account.
What Treasury Bills Are
Treasury bills, often called T-bills, are short-term debt securities issued by the US Department of the Treasury. When you buy one, you are lending money to the federal government for a short period.
T-bills have maturities of one year or less. Common terms include 4, 8, 13, 17, 26 and 52 weeks, giving investors flexibility to match the investment to their timeline.
Unlike many bonds, T-bills do not pay periodic interest. Instead, they are sold at a discount to their face value, and you receive the full face value when the bill matures.
The difference between the purchase price and the face value is your interest. For example, buying a 1,000 dollar T-bill for 980 dollars means you earn 20 dollars when it matures.
T-bills are backed by the full faith and credit of the US government. They are widely considered among the safest investments available, which makes them popular for short-term savings.
Because maturities are short, T-bill yields change frequently. Rates generally follow broader interest rate trends, rising when the Federal Reserve raises rates and falling when rates decline.
It helps to see the yield as an annual figure. Because T-bills mature in weeks or months, their quoted yields are annualized, so a 26-week bill paying a certain yield earns roughly half that percentage over its actual six-month life.
Advantages of T-Bills
Safety is the primary advantage. When held to maturity, T-bills return their full face value, making them ideal for money you cannot afford to lose.
T-bill interest is exempt from state and local income taxes. This can make them more attractive than savings accounts or CDs for people who live in states with high income taxes.
Short maturities provide flexibility. You can choose terms that align with planned expenses, such as tuition payments, tax bills or a home purchase.
T-bills are highly liquid when held in a brokerage account. They can usually be sold before maturity, although the price may vary depending on interest rates.
Purchasing T-bills is straightforward. They can be bought directly from the government or through most major brokerage firms, often without commissions.
For people with larger cash balances, T-bills can complement high-yield savings accounts. Spreading cash between the two may balance convenience with tax efficiency.
T-bills can also play a role in a broader plan. Money set aside for property taxes, insurance premiums or a known tuition payment can earn a competitive return in a T-bill that matures shortly before the bill is due, then be used exactly as planned.
How to Buy Treasury Bills
You can buy T-bills directly through the Treasury’s official online platform. Creating an account allows you to participate in regular auctions and hold securities directly with the government.
Brokerage accounts offer another option. Many brokerages let you buy new T-bills at auction or purchase existing bills on the secondary market, often with more flexible selling options.
Most investors place noncompetitive bids at auction. This means you accept the yield determined by the auction and are guaranteed to receive the bill in the amount you request.
T-bills are usually sold in increments of 100 dollars. This makes them accessible to investors with relatively small amounts of money.
Some platforms allow automatic reinvestment when a bill matures. This feature can be helpful if you want to roll money into new T-bills continuously.
Be sure to understand settlement dates and maturity schedules. Knowing exactly when funds will be available helps you plan for upcoming expenses.
T-Bills Versus Other Cash Options
High-yield savings accounts offer instant access and FDIC insurance. However, their interest is taxable at the state level, and rates can change at any time.
Certificates of deposit lock in rates for a set term. CDs may offer competitive yields, but early withdrawal penalties can reduce flexibility.
Money market funds often invest heavily in Treasury securities. They provide easy access to cash, though they are not FDIC-insured and yields fluctuate daily.
T-bills may provide higher after-tax returns for residents of high-tax states. Comparing after-tax yields helps determine which option is best.
Many investors use a combination of cash options. An emergency fund may stay in a high-yield savings account, while money for planned expenses may be invested in T-bills.
Matching each cash option to its purpose helps maximize returns while preserving safety and accessibility.
Consider convenience as well as yield. Transferring money in and out of a government account or brokerage takes a few business days, while a savings account at your main bank is available instantly, so keep enough readily accessible cash for everyday surprises.
Potential Drawbacks and Tips
T-bill yields are generally lower than long-term investments such as stocks. They are designed for safety and short-term goals rather than long-term growth.
Selling before maturity may result in gains or losses. If interest rates rise after you buy, the market value of your T-bill may decline.
Federal income tax still applies to T-bill interest. Investors should report earnings on their federal tax returns.
Reinvesting regularly may expose you to changing rates. If rates fall, future T-bill purchases may earn less.
Consider building a T-bill ladder. Buying bills with staggered maturities can provide regular access to cash while keeping money invested.
Treasury bills are a simple and safe tool for short-term savings. Understanding how they work can help you earn competitive returns while protecting your cash.
