The 3-month US treasury bond/bill rate currently stands at 4.22% (as of February 2025),which is higher than last year's rate of 5.31%. This treasury bill rate represents the yield investors receive when purchasing a government-issued treasury security with a three-month maturity.
In this article, we will discuss everything about treasury bills, the types, and their features
What are treasury bills?
Treasury bills (T-bills) are short-term debt securities issued by the US government. They are considered less risky investments due to their backing by the US Department of the Treasury. T-bills usually mature within four to 52 weeks. When issued, T-bills are sold at a discount from their face value (the amount paid upon maturity). Investors earn interest by the difference between the purchase price and the face value. The treasury bill rates vary every month, meaning that the 1-month treasury bill rate (5.18% currently) will differ from the 6-month treasury bill rate (4.53% currently).
Most T-bills have a minimum denomination of $100, but larger denominations, up to $5 million, are available through noncompetitive bidding. The US Treasury sells T-bills through auctions, where investors can participate in competitive or noncompetitive bidding. Competitive bidders specify the price they are willing to pay, while non-competitive bidders purchase a predetermined amount of T-bills at the auction's prevailing market rate.
Types of treasury bills
Short-term maturities
- 4-week bill: This is the shortest-term T-bill, maturing four weeks from the date of issuance
- 8-week bill: This bill matures eight weeks after issuance
- 13-week bill: Also known as a ‘three-month bill’, it matures 13 weeks from the date of issuance
Intermediate maturities
- 17-week bill: This is a medium-term bill, maturing 17 weeks after issuance
- 26-week bill: This bill matures 26 weeks after issuance
Long-term maturity
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52-week bill: This is the longest-term T-bill, maturing 52 weeks or a year from the date of issuance
Features of treasury bills
Short-term maturity
Treasury bills are short-term debt instruments, maturing within a year. This feature makes them attractive to investors seeking temporary or short-term investments for liquidity.
Discounted issuance
Treasury bills are issued at a discount to their face value. This means investors purchase them for less than their stated value. The difference between the purchase price and the face value represents the interest earned.
Face value
The face value is the amount that the investor will receive upon maturity of the treasury bill. The minimum face value of t-bills in the US is $100.
No coupon payments
Unlike government bonds that make periodic interest payments (coupons), treasury bills do not pay any interest. Instead, the interest is earned through the discount at which they are purchased.
Government backing
Treasury bills are backed by the full faith and credit of the issuing government.
Issued in various denominations
Treasury bills are typically available in various denominations, making them accessible to investors with different financial capacities. This can range from small denominations for individual investors ($100) to larger denominations for institutional investors (such as $10 million at max).
Auction timelines
All Treasury bills, except for 52-week bills and cash management bills, are auctioned weekly. The 52-week bills, however, are auctioned every four weeks.
Advantages and risks of investing in treasury bills
Advantages
- Liquidity: They are highly liquid, meaning they can be easily bought and sold in the secondary market
- Low risk of default: Due to the government backing, the risk of default is minimal
- Predictable returns: The returns on t-bills are generally predictable, as they are issued at a discount to their face value and redeemed at face value upon maturity
Risks
- Low returns: Compared to other investment options, t-bills offer relatively low returns. This is due to their low-risk nature
- Inflation risk: If inflation rates rise faster than the interest earned on treasury bills, the real purchasing power of the investment may decline
- Opportunity cost: Investing in treasury bills means forgoing potentially higher returns from other investments with greater risk
Stepwise guide to invest in treasury bills
- Understand treasury bills: Before investing in them, it's crucial to grasp their fundamental characteristics, such as maturity date, payment schedule, etc.
- Choose a purchasing method: Investors can purchase treasury bills through various methods, such as a TreasuryDirect account, which is a government-run online platform that allows one to purchase Treasury bills directly from the US treasury or via a broker.
- Select the type and maturity of treasury bills: Once an investor has opened an account, they can choose the type of treasury bill they want to invest in based on their investment goals and risk tolerance. Factors to consider include the maturity period and the specific type of bill.
- Place and confirm order: After selecting the type and maturity, investors must place their order. This involves specifying the amount they want to invest. Once they’ve placed the order, review it carefully and confirm it.
- Monitor investment: After purchasing treasury bills, it's essential to monitor the investment. This includes keeping track of the bill's maturity date and any changes in t-bill interest rates that could affect its value.
- Receive the discounted face value: Treasury bills are typically purchased at a discount to their face value. This means investors will pay less than the full amount the bill is worth at maturity.
- Redeem at maturity: Upon maturity, the investor receives the face value of the treasury bill, which is the full amount stated on the security. They can either reinvest the proceeds or withdraw them.
Trading treasury bills as a part of one’s investment strategy
Treasury bills can add value to one’s investment strategy due to their low-risk and high-liquid characteristics. However, their relatively low returns may not align with the goals of all investors. To incorporate treasury bills correctly, consider them as a component of a diversified portfolio, balancing them with higher-yielding but potentially riskier assets.
Please note that Blueberry does not issue or make a market in fixed income instruments, including treasury bonds, treasury bills and corporate bonds. This article is for informational purposes only and does not constitute financial advice or a recommendation to invest.
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