Treasury Bills Explainer
Treasury bills, commonly called T-bills, are short-term debt securities issued by the U.S. Treasury to finance government operations and manage cash needs. They mature in one year or less and normally do not make periodic coupon payments. Instead, an investor may buy a bill below its face value and receive the face value at maturity, with the difference representing interest.
New bills are sold through Treasury auctions. Noncompetitive bidders agree to accept the auction result, while competitive bidders specify the rate or yield they require and may receive all, part, or none of the amount requested. After issuance, marketable bills can be sold before maturity through banks or brokers, and their price will reflect prevailing short-term rates and demand.
Bill quotations can be confusing because discount rates, investment rates, prices, and yields use different conventions. A bill bought for less than face value does not earn its quoted discount rate on the full purchase price in exactly the same way a bank deposit earns interest. Comparing investments requires using a consistent yield measure and time basis.
T-bills are backed by the full faith and credit of the U.S. government, but that does not eliminate every risk. Selling early can produce a gain or loss, inflation can erode purchasing power, and repeated reinvestment exposes the holder to changing rates. Interest is subject to federal income tax but generally exempt from state and local income taxes.
T-bills mature in one year or less and usually pay no periodic coupon.
Return generally comes from the difference between purchase price and face value.
Competitive and noncompetitive bids lead to one auction result for accepted buyers.
Bills may later trade in the secondary market.
Inflation, early-sale pricing, and reinvestment rates still matter.
Yield conventions must be compared carefully.
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