What Are Treasury Bills (T-Bills) and How Can You Buy Them?

March 05, 2021 · 6 minute read

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What Are Treasury Bills (T-Bills) and How Can You Buy Them?

Government-backed securities like treasury bills (T-bills) provide a way to invest with minimal risk. These debt instruments are one of several different types of treasury securities including treasury notes (T-notes) and treasury bonds (T-bonds).

Investors looking for a low-risk investment with a short time horizon and a way to save may find T-bills an attractive investment. T-bills have minimal default risk and maturities of a year or less, though treasury bill rates are typically lower than those of some other investments.

To help you assess whether treasury bills are right for your investment mix, here’s a deep dive into how they work, the benefits, and how you can start investing in them.

What is a Treasury Bill?

Treasury bills (T-bills) are debt instruments issued by the U.S. government. The government’s money from selling these debt securities helps them pay for their expenses. Essentially, when an individual buys a T-bill, they are lending money to the US government.

In general, T-bills are considered low risk, since they are backed by the US government. Investors can purchase specific treasury bills with terms that range anywhere from a couple days to a year.

The government issues T-bills in four, eight, 13, 26, and 52-week terms, with face values typically ranging from $1,000 to $5 million.

Treasury Bill Rates

While all securities have a face value, also known as a par amount, typically investors can purchase treasury bills at a discount. Then, when the t-bill matures, investors receive the face value amount. So, if they purchased a treasury bill for less than it was worth, they would receive a greater amount when it matures

For example, suppose an investor purchases a treasury bill for $4,500 with a par value of $5,000. Since the government promises to repay the full value of the T-bill when it expires, the investors will make a profit of $500.

In the example above, the discount rate of the T-bill is 10%—and that is also the rate of profit. But examples aside, the actual 1-year treasury bill rate is currently 0.36%—lower than the long-term average of 4.79%.

Treasury Notes vs. Treasury Bonds

Because all securities issued by the U.S. government are commonly known as treasuries, it’s easy to confuse the different types of fixed-income instruments issued by the government. To help differentiate these securities, here are the features that make them unique.

Treasury Notes

Investors can purchase treasury notes (or T-notes) in quantities of $1,000 and with terms ranging from two to 10 years. Treasury notes offer interest, known as coupon payments, bi-annually.

Treasury Bonds

Out of all treasury securities, treasury bonds have the most extended maturity terms, ranging from 10 to 30 years. Like T-notes, treasury bonds pay interest every six months. And, when the bond matures, the entire value of the bond is repaid.

How to Buy Treasury Bills

T-bills can be purchased through a broker-dealer or TreasuryDirect . There are three different ways investors can purchase T-bills.

•   Noncompetitive bids: With a noncompetitive bill, the investor accepts the discount prices that were established at the treasuries auction. Since the investor will receive the full value of the T-bill when the term expires, some investors often favor this simple technique of investing in T-bills.
•   Competitive bid: With a competitive bid, all investors propose the discount rate they are prepared to pay for a given T-bill. The lowest discount rate offers are selected first. If investors don’t propose enough low bids to complete the entire order, the auction will move onto the next lowest bid and so on until the entire order is filled.
•   Secondary market: Another option is to purchase T-bills on a secondary market. Investors can also trade exchange-traded funds (ETFs) or mutual funds that may include T-bills that were released in the past.

Advantages of Investing in Treasury Bills

There are a number of benefits to investing in T-bills.

•   They are a low-risk investment. Since they are backed in the full faith of the U.S. government, there is a slim to none chance of default. This means that it is improbable that investors will lose their money when investing in treasury bills.
•   They have a low barrier to entry. In other words, investors who don’t have a lot of money to invest can invest a small amount of money while earning a return.
•   They can help diversify a portfolio. Diversifying a portfolio helps investors minimize risk exposure by spreading funds across various investment opportunities of varying risks and potential returns. When economic uncertainty arises, these securities tend to perform. Their performance can help offset some of the negative performance of stocks in an investor’s portfolio.

Risks of Investing in Treasury Bills

Like any other investment, treasury bills have a few drawbacks.

•   Low yield. T-bills provide a lower yield compared to other high yield bonds or investments such as stocks. So, for investors looking for higher yields, treasury bills might not be the way to go.
•   Inflation risk exposure. T-bills are exposed to risks such as inflation. If the inflation rate is 4% and a T-bill has a discount rate of 2%, for example, it wouldn’t make sense to invest in T-bills—the inflation exceeds the return an investor would receive, and they would lose money on the investment.

Using Treasury Bills to Diversify

Investing all of one’s money into one asset class leaves an investor exposed to a higher rate of risk. To mitigate risk, investors may turn to diversification as an investing strategy.

With diversification, investors place their money in an assortment of investments—anything from stocks and bonds to real estate and other alternative investments—rather than placing all of their money into one investment. Then they will diversify in each asset class and sector to truly ensure all investments are spread out.

For example, to reduce the risk of economic uncertainty that tends to impact stocks, investors may choose to invest in the U.S. Treasury securities, such as mutual funds that carry T-bills, to offset these stocks’ potentially negative performance. Since the U.S. Treasuries tend to perform well in such environments, they may help minimize an investor’s loss from stocks not performing.

The Takeaway

Treasury bills are one investment opportunity offered by the government, in which an investor is basically lending money to the government for the short term. While the return on T-bills may be lower than the typical return on other investments, the risk is also generally lower, as the US government backs these bills.

Investing in treasury bills is one way an investor might choose to diversify their asset mix. Another way to build a portfolio that works with your risk tolerance and financial goals is with a SoFi Invest® online trading account.

With SoFi, you can choose to trade stocks and ETFs yourself actively, or SoFi can create a portfolio for you based on your investment goals. And, if you need a little more guidance, SoFi members have complete access to complimentary financial advisors who are ready to answer all of your investing questions.

Find out how to make your money work for you with SoFi Invest.

Photo credit: iStock/Marco VDM

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.


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