This most recent announcement sent investors into a frenzy, with many panic-selling their investments to avoid incurring fed-induced losses. For investors who can’t stomach the roller coaster that is investing in the stock market in a high-inflation environment, they’re turning to safe haven assets like treasury bills—and it may pay off in the short-term.
Investors may be able to generate ‘attractive returns’ as rates continue to rise
Treasury bills, sometimes referred to as T-bills, are short-term securities issued by the U.S. treasury that are backed by the U.S. government with terms ranging from four weeks to 52 weeks.
For the duration of your term, you’re agreeing to lend the U.S. government money in the form of this bill, which is usually sold in increments of $100. When your treasury bill reaches maturity at the end of your term, you’ll get your money back—plus interest. And, unlike other savings vehicles like certificates of deposit (CDs), you can sell a treasury bill before it matures. For savers who value liquidity, this could be a key selling point.
T-bills are sold at face value or at a “discount.” And once they mature, you get the face value in return. The difference between the face value and the discounted price you initially paid is “interest.” That discount represents the rate of return you can expect once your T-bill reaches maturity.
Say a $1,000 52-week (one-year) bill sells for a discount rate of 0.04%. To see what the purchase price will be for a particular discount rate, use the formula:
Price = Face value (1 – (discount rate x time)/360)
In this example it would be: Price = 1000 (1-(.04 x 365)/360
Giving us $959.44
In this example, the bill sells for $959.44, giving you a discount of $40.56. So when you get $1,000 after a year, you have earned $40.56 in “interest.”
“T-Bills are an attractive option for investors today because their yields are higher than longer Treasuries that have maturities ranging from 2 to 30 years. Depending on the length of the T-Bill investors can get yields approaching 5%,” says Kevin Nicholson, Global CIO of Fixed Income at RiverFront Investment Group. “For example, a 6-month T-Bill is currently yielding 4.75% while the 10-year Treasury is yielding 3.47%. Therefore, investors do not have to tie up their money for a long period of time to get an attractive return.”
How to invest in T-bills and what to consider before you do
You can invest in treasury bills directly from the U.S. government via the TreasuryDirect portal, although treasury bills can also be purchased and sold through your bank or brokerage.
Experts say there are a few considerations you should make before taking the leap.
- Rising interest rates: The Fed’s recent interest rate increase likely won’t be the last, which could influence the T-bill term you select. “Investors should consider their interest rate expectations over the next year given that the Fed has raised interest rates to fight inflation,” says Nicholson. “Investors must weigh the possibility of facing reinvestment risk, that is the potential that yields could be lower when the T-Bill matures, especially if they choose to invest in shorter maturity T-Bills as a substitute for long maturing treasuries today.”
- You’ll still owe (some) taxes: T-bills are exempt from state and local taxes, although they are still subject to taxes at the federal level.
- T-bills won’t reward you with regular interest payments: If you’re looking for a pick-me-up in the form of a regular interest payment, T-bills aren’t for you. Because T-bills are short-term investments, you won’t receive frequent interest payments the way you would with a bond or high-yield savings account.
The takeaway
If you’re new to investing, or simply looking for a low-risk way to grow your money in a volatile market, you might consider buying treasury bills. Although, it’s important to make sure that you understand how they work, how much you stand to gain at maturity, and determine whether this type of investment fits into your investment strategy.
FAQs
A Treasury bill (T-bill) is a short-term U.S. government debt obligation backed by the U.S. Department of the Treasury. Terms range from four to 52 weeks. T-bills are issued at a discount from the par value, also known as the face value. Treasury bills are usually sold in denominations of $100.
How much does a $1000 T bill cost? ›
Treasury bills, or bills, are typically issued at a discount from the par amount (also called face value). For example, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86 ($1,000 x . 99986111 = $999.86111). * When the bill matures, you would be paid its face value, $1,000.
How do you make money on Treasury bills? ›
T-bills are sold at a discount or face (par) value. Purchasing them at a discount allows investors to earn a return and receive the full value of the investment at maturity.
Are Treasury bills worth investing in? ›
The difference between the discounted rate and the full price at maturity is the same as the advertised interest rate for Treasury bills. Treasury bills are considered one of the safest investments you can make since they are backed by the full credit of the U.S. government, which has never defaulted on its debts.
How much will I make on a 3 month treasury bill? ›
3 Month Treasury Bill Rate is at 4.85%, compared to 4.89% the previous market day and 5.31% last year. This is higher than the long term average of 4.19%.
What happens when a T-bill matures? ›
When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
Are treasury bills better than CDs? ›
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
Do I pay taxes on T-bills? ›
Key Takeaways. Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT.
Why does Warren Buffett buy T-bills? ›
Buffett hasn't been a fan of bonds for a long time. He prefers equities, which offer capital-appreciation potential, and cash—mostly risk-free U.S. Treasury bills—which mature within a year. Berkshire held $235 billion of T-bills on June 30.
How do Treasury bills work for dummies? ›
US Treasury Bills are short-term, 4 weeks to a year, fixed term securities. They do not pay interest, instead they are sold at a discount to face value so you will get more back at maturity. Treasury notes are fixed term, fixed interest rate securities with durations between two and ten years.
For this reason, T-bills have interest rate risk, which means there is a danger that bondholders might lose out should there be higher rates in the future. Although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit.
Are T-bills FDIC insured? ›
No, Treasury Bills (T-Bills) are not insured by the Federal Deposit Insurance Corporation (FDIC). However, they are backed by the full faith and credit of the U.S. Government, making them considered one of the safest investments.
What is the difference between a Treasury note and a Treasury bill? ›
T-notes mature between two and 10 years, with semiannual interest payments, while T-bills have the shortest maturity terms—from four weeks to a year. These all can be bought and sold in the secondary market, except for savings bonds, which are registered to a single owner.
How do T-bills pay out? ›
Treasury notes and Treasury bonds pay interest every six months. Treasury bills don't pay a fixed interest rate. Instead, they are sold at a discount rate to their face value. The “interest” you receive (so to speak) is the difference between the face value of the bill and its discount rate when it matures.
How to buy T-bills? ›
You can only buy T-bills in electronic form, either from a brokerage firm or directly from the government at TreasuryDirect.gov. (You can also buy Series I savings bonds through TreasuryDirect.gov).
How much will $10,000 be worth in 20 years? ›
The table below shows the present value (PV) of $10,000 in 20 years for interest rates from 2% to 30%. As you will see, the future value of $10,000 over 20 years can range from $14,859.47 to $1,900,496.38.
How do you calculate the price of a T-bill? ›
As a simple example, say you want to buy a $1,000 Treasury bill with 180 days to maturity, yielding 1.5%. To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25.
Do banks charge to buy T-bills? ›
Treasury bills (T-bills) are short-term securities with maturities ranging from four weeks to 52 weeks. By buying directly from the U.S. Treasury, you can avoid paying any extra fees or commissions to your bank.
How much is a $1000.00 bill worth? ›
Deciding the Value of a $1000 Bill Based on its Condition/Grade
| $1000 Currency Note Condition | Estimate Collectible Value |
|---|
| Very Good Condition | $1,500 |
| Fine to Very Fine Condition | $1,800 – 3,500 |
| Uncirculated or Gem Uncirculated Condition | Tens of thousands of dollars (as per rarity, serial number, demand, etc.) |
May 4, 2024
To calculate yield, subtract the bill's purchase price from its face value and then divide the result by the bill's purchase price. Finally, multiply your answer by 100 to convert it to a percentage.
