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What Are Treasury Bills (T-Bills)?
A Treasury Bill, commonly known as a T-Bill, is a short-term government debt obligation issued by the U.S. Treasury Department, with maturity periods ranging from four to 52 weeks. T-bills are sold at a discount and are redeemed at face value. The difference between the purchase price and the par value represents the interest earned.
T-bills are available in denominations starting at $1,000, with some reaching up to $5 million through non-competitive bids. They can be purchased directly from the government during auctions or through the secondary market via banks and brokers.
Key Highlights
- Short-Term Security: T-Bills are short-term, maturing within one year.
- Denominations: Sold in minimum denominations of $1,000.
- Rate Dependence: Rates are influenced by expected interest rate movements.
How to Purchase Treasury Bills
The U.S. government issues T-bills to finance various public initiatives, such as infrastructure and educational projects. Investors can acquire T-Bills either through competitive or non-competitive bidding.
Treasury Direct
Treasury Direct allows investors to buy new T-bills directly from the government at TreasuryDirect.gov. Bidding can be competitive where the investor specifies the yield, or non-competitive where the bid price is determined by the average auction price.
Secondary Market
Secondary Market buyers include individuals, banks, and brokers. Investors purchase T-bills, and the final transaction represents a statement from the government indicating the invested amount and terms.
Maturities
T-bills come in various maturity periods, such as 4, 8, 13, 17, 26, and 52 weeks. Longer maturity dates generally offer higher rates. Current details as per market close on 02/02/2024:
| Date | 4-Week T-Bills | 8-Week T-Bills | 13-Week T-Bills | 17-Week T-Bills | 26-Week T-Bills | 52-Week T-Bills |
|---|---|---|---|---|---|---|
| Today | 5.39% | 5.40% | 5.39% | 5.37% | 5.24% | 4.82% |
| ————– | —————- | —————- | —————– | —————– | —————– | —————– |
Redemptions and Interest
T-bills are issued below their par value\u2014i.e., you pay less than the face value at the time of purchase. For instance, if you purchase a $1,000 T-bill for $950, the $50 difference at maturity represents your earned interest.
Pros and Cons of Investing in T-Bills
Pros
- Zero Default Risk: They come with a guarantee from the U.S. government.
- Low Minimum Investment: Starting as low as $100.
- Tax Advantages: Interest income is exempt from state and local taxes.
- High Liquidity: Easily bought and sold in the secondary market.
Cons
- Low Returns: Earnings are often lower than other investment types.
- No Periodic Interest Payments: No interest is paid until maturity.
- Interest Rate Risk: Existing T-bill rates can become less attractive in a rising rate environment.
Influence of Federal Reserve Policy
The Federal Reserve’s policies significantly impact T-Bill prices. When the Fed’s monetary policy is expansionary, T-bill prices tend to increase. Conversely, when the Fed sells its debt securities, prices generally fall.
Effect of Inflation on Treasury Bills
High inflation rates typically reduce the desirability of T-Bills as they yield relatively lower returns compared to the increased cost of living, prompting investors to seek higher-yield options.
Types of U.S. Treasury Debt Securities
In addition to T-Bills, the U.S. Treasury issues other types of debt securities:
- Treasury Notes: Medium-term investments, maturing in 2 to 10 years.
- Treasury Bonds: Long-term securities with a 30-year maturity.
The Bottom Line
Treasury Bills offer a low-risk, short-term investment backed by the U.S. government. Although the returns may be lower compared to other investments, the high liquidity and reliability make them an attractive option for risk-averse investors.
Related Terms: Treasury Bonds, Treasury Notes, Government Securities, Debt Instruments, Federal Reserve Policy
References
- TreasuryDirect. “How Treasury Auctions Work”.
- TreasuryDirect. “Auctions”.
- TreasuryDirect. “Treasury Bills: Rates & Terms”.
- U.S. Department of the Treasury. “Daily Treasury Bill Rates”.
- TreasuryDirect. “Treasury Bills: FAQs”.
- TreasuryDirect. “Auction Query”.
- TreasuryDirect. “Treasury Bills in Depth”.
- TreasuryDirect. “Treasury Bills”.
- Federal Reserve Bank of San Francisco. “What Is the Fed: Monetary Policy”.
- Federal Reserve Bank of San Francisco. “What Makes Treasury Bill Rates Rise and Fall? What Effect Does the Economy Have on T-Bill Rates?”
- Treasury Direct. “Treasury Bills”.
