What Are Treasury Bills?

Fixed-income securities are a mainstay in most portfolio strategies. However, there are several different types to choose from, including both corporate and government bonds. A notable option is Treasury bills, which are short-term debt obligations that are fully backed by the United States government.

This article will break down how Treasury bills work and where they might fit into a person’s portfolio. We’ll include an overview of the pros and cons and how you can buy the notes if you decide to add them to your portfolio.

How Treasury Bills Work

Treasury bills, or T-bills, are short-term notes that the U.S. federal government issues to investors. They’re assigned a face value; however, typically you buy them at a slight discount. Once the note matures, you’re able to sell it for its face value and receive a profit.

The government allows you to buy $100 to $10 million of T-bills, provided it’s a non-competitive bid. If it’s a competitive bid, it must be 35% of the offering amount. You must buy the notes in increments of $100 for terms of four to 52 weeks. During periods of higher interest rates, long-term notes tend to pay out more; however, if rates fall, returns typically will as well.

Like other Treasury securities, T-bills are backed by the full faith and credit of the U.S. government. This makes them very safe investments. A potential risk of loss if you decide to sell your note(s) on the secondary market before maturity. Additionally, your returns could be worth less due to market conditions, such as inflation or changing interest rates.

Role of Treasury Bills in a Portfolio

T-bills are a low-risk, short-term investment that many put to use within their portfolio. Because of these benefits, there are a variety of reasons why you may want to add them to your portfolio. Below are potential applications to consider for T-bills:

• Capital preservation. T-bills can be useful for maintaining your wealth because they’re very low-risk and provide small returns. And, as we’ll mention later on, they are exempt from state and local taxes, which can cut into your earnings from other securities.
• Diversification. Adding fixed-income securities, like T-bills, is a common way to manage risk and achieve your desired level of diversification within your portfolio.
• Liquidity. The longest T-bill term is up to one year, which makes them particularly liquid. You’re also able to sell them at any point before maturity, which can be advantageous if you need the cash right away.
• State and local tax exemptions. T-bills are an opportunity to add an asset to your portfolio that avoids pesky local taxes.

Before adding T-bills to your portfolio, we recommend speaking with a financial advisor. They can help you decide whether these or other fixed-income securities are the right fit.

Pros and Cons of Treasury Bills

T-bills can be an effective and beneficial short-term investment option. They are highly liquid, with both brief maturity terms and the ability to sell them on the secondary market. Additionally, their backing by the government makes them very low risk.

It’s also important, however, to consider the potential downsides of adding T-bills to your portfolio. The value of returns can be cut into by rising inflation and fluctuating interest rates. Additionally, while the security is low risk, it provides relatively small returns. This may or may not be ideal for your portfolio strategy, depending on your goals and time horizon.

How to Invest in Treasury Bills

You can invest in T-bills through a variety of different methods. The first and most direct way to do so is through TreasuryDirect, a platform offered by the U.S. Treasury. You may also buy these notes through either a brokerage account or a bank. This includes tax-advantaged retirement accounts, such as a traditional or Roth IRA.

We recommend speaking with a financial advisor before you decide to add T-bills to your portfolio. They may be beneficial to you, but it’s always a good idea to ensure that they’re the right choice for your goals, risk tolerance, and time horizon. If you need to find a high-quality advisor near you, consider this free matching tool, which will connect you with a vetted expert who aligns with your needs.

Frequently Asked Questions

Are treasury bills a good short-term investment?

T-bills can be a good short-term investment if you’re looking for a low-risk option. You should consider, however, that returns likely won’t be as high as other securities, including those in the fixed-income asset class. It’s a good idea to discuss any interest you have in T-bills with a financial advisor to gauge where they fit into your strategy.

How are treasury bills different than bonds?

Similar to bonds, T-bills are debt obligations from the federal government to you. The key difference, however, is that they don’t earn any interest as you hold them. Rather, you buy them at a discount and, once they mature, sell them at face value for a small profit.

Do you pay taxes on treasury bill earnings?

You must federal income taxes on earnings from T-bills. However, you do not need to pay state or local taxes, even in areas that typically collect it for other earnings.

What is the main advantage of treasury bills?

The key advantage of T-bills is that they are a low-risk option if you’re looking for modest returns in the short term. Their liquidity and safety make them a flexible way to earn money while being able to recoup your investment at virtually any time.