How to Buy T-Bills and How T-Bills Work
Treasury Bills or T-Bills can be useful fixed-income assets for investors who want to combine sufficient returns with a low-risk asset. T-Bills can be bought directly through Treasury Direct or owned within another investment vehicle such as a mutual fund, money market, or ETF.
For years, Treasury Bills (also known as T-Bills) haven’t exactly been an attractive investment.
Because they’re purchased in auctions, a T-Bill’s value is set by whatever people are willing to pay in the open market.
For many years now, the bid price of T-Bills has been pushed up by investors starved for dependable returns elsewhere. As a result, they’re willing to pay more for T-bills pushing the discount rate down in the process.
For example, the equivalent coupon rate of T-Bills was around 1.5% in January 2020.
Because higher interest returns were more widely available in January of 2023, that rate had increased to 4.75% or more depending on the duration of the certificate.
In summary, as interest rates climb steadily the yields on T-Bills follow suit, making them a more attractive option for short-term investors.
What is a T-Bill?
A T-Bill is a type of short-term bond issued by the U.S. Treasury.
They are sold in $100 increments in auctions hosted by the Treasury.
The actual return or equivalent coupon rate is determined by how much one pays for the T-Bill in an auction.
The lower the bid price, the higher the “interest” or return for the holder of the T-Bill.
For example, assume Tracy T-Bill buys ten 13-week T-Bills at auction for $989.00. When the T-Bills mature, she will be given $100 for each T-Bill for a total of $1,000.
Since Tracy made $11 on the transaction, her effective annual rate of return is 4.45%. (11/989 = 1.112% > 4 x 1.112% = 4.45%)
Because this is a 13-week T-Bill, we multiply the actual return rate by 4 to get a projected annual rate of return.
It’s helpful to calculate this so one can compare the rate against other fixed-income assets with posted annual rates of return.
Treasury Bonds are bought and sold in a similar fashion but are long-term debt of either 20 or 30 years.
T-Bills are sold with maturity periods of 4, 8, 13, 17, 26, and 52 weeks.
Auctions are held weekly for 4, 8, 13, 17, and 26-week T-Bills. Auctions for 52-week T-Bills occur every four weeks.
One doesn’t have to actually offer a competitive bid in order to buy T-Bills. Rather, you could offer a non-competitive bid which means you are electing to purchase the T-Bills at market price.
The market price is set by those bidding in the auction.
If you elect to enter a competitive bid, you can specify the discount rate or yield, but you are not guaranteed to receive any of the T-Bills as you would be in a non-competitive bid.
Most bidders in the auctions are banks, insurance companies, businesses, or other financial institutions.
The maximum limit for purchasing T-Bills in a non-competitive bid is $10MM. Competitive bidders can purchase up to 35% of the current offering amount.
Another attractive feature of T-Bills is that the returns are exempt from state and local taxes. T-Bills are not exempt from federal taxes, however.
When Might I Want to Invest in T-Bills?
The three key characteristics of T-Bills are:
- T-Bills are a short-term investment;
- The effective interest on T-Bills is tied closely to prevailing interest rates;
- There’s almost no risk in owning T-Bills as they are backed by the U.S. government.
Up until the recent increase in interest rates by the Fed, T-bills weren’t a terribly attractive option for investors.
With a booming stock market and interest rates at near-record lows, they just didn’t have a lot to offer beyond security.
However, now that interest rates have climbed and we find ourselves in a recession of sorts (depending on who you ask), T-Bills make a lot more sense for people looking for a secure place to save money and still earn decent returns.
So, assuming interest rates are in a medium to high status, T-Bills make a lot of sense if you have some money to save, but can’t park it in a long-term investment or expose it to the risks of the stock market.
To me, they’re a good solution if you’re saving up for a large purchase that you know you won’t make before the T-Bills mature.
They also make a lot of sense for retirees who want to provide some protection against inflation risk, generate some return, but also be available for liquidation in the near term.
How Can I Buy T-Bills?
Treasury Direct
Anyone with a social security number, a U.S. mailing address, an email address, and a checking or savings account can open an account with TreasuryDirect.gov.
It takes about 15 minutes to set up and while no one ever accused Treasury Direct of being the most user-friendly website, if you have some technical skill, you should be able to navigate the process just fine.
ETFs, Money Markets, & Mutual Funds
Perhaps the easiest way to buy and sell T-bills is to purchase a short-term bond fund, money market, or ETF.
In this form, you can buy and sell the T-Bills as needed while enjoying similar returns in the same low-risk investment.
Bear in mind, there are small management expenses associated with owning these funds that you would not have to incur when buying directly from the government.
In all likelihood, these paltry costs would be offset by the convenience of easy liquidation and not having to use Treasury Direct.
Secondary Markets
T-Bills cannot be sold back to the Treasury once they are purchased. They can, however, be bought and sold in secondary markets.
Most investment brokerages will sell Treasuries to their customers and in the case of Treasury Bonds, many do so without any fees.
Other Treasury Securities
As I was writing this it occurred to me that the various types of Treasury Securities (a.k.a. “Treasuries”) can easily be confused.
Here is a quick rundown of the different types and some of their important characteristics.
Treasury Bills or T-Bills – Short-Term debt sold in $100 increments by the government in an auction format. Taxable at the federal level, but not state and local.
Treasury Notes – Medium-Term debt (2, 3, 5, 7, or 10 years) sold in $100 increments by the government in an auction format. Taxable at the federal level, but not state and local.
Treasury Bonds – Long-Term debt (20 or 30 years) sold in $100 increments by the government in an auction format. Interest on the debt is paid every six months until the bonds mature. Taxable at the federal level, but not state and local.
Treasury Inflation-Protected Securities or TIPS – Medium to Long-Term (5, 10, or 30 years) sold in $100 increments by the government in an auction format. Interest on the debt is paid every six months until the bonds mature.
TIPS offer inflation protection by having an adjustable face or par value. If the face value increases between when you buy and when the bond matures, you get to keep the difference.
TIPS are taxable at the federal level, but not state and local.
Floating Rate Notes or FRNs – Short-Term debt (2 years only) sold in $100 units, FRNs can be sold before maturity. Interest payments are made quarterly until the notes mature.
The floating rate of FRNs is based on the going rate for 13-week T-Bills and a spread rate that doesn’t change throughout the life of the note.
Savings Bonds (EE Bonds and I-Bonds)
EE Bonds earn a fixed interest rate but are guaranteed to double in value over a 20-year period. The interest is applied to a new principal that increases over time.
EE Bonds are sold electronically and are available at any price, to the penny, beyond $25. There is a $10,000 purchase limit annually per social security number for EE Bonds.
I-Bonds earn interest monthly, compounded semi-annually. This means every six months the I-Bonds receive a new principal value that grows over time.
There is a somewhat complex formula for calculating the interest rate on I-Bonds which combines a fixed rate with the rate of inflation. See the link below for details.
I-Bonds are available in electronic or paper form, though paper I-Bonds are only available in $50, $100, $200, $500, or $1,000 increments. In electronic form, they can be purchased to the penny in any increment over $25.
There is an annual limit of $10,000 annually for the purchase of I-Bonds per social security number, but you can purchase an additional $5,000 of paper I-Bonds with your tax refund if you so choose.
We wrote a lot more about I-Bonds here.
EE Bonds and I-Bonds can be cashed in at any time 12 months after purchase up to their maturity in 30 years. However, if they are sold prior to 5 years after the purchase date, the owner forfeits 3 months of interest.
