Treasury Bills Are Paying Above 5%. Here’s Why It Matters - NerdWallet (2024)

What is a Treasury bill?

Treasury bills — or T-bills — are short-term U.S. debt securities issued by the federal government that mature over a time period of four weeks to one year. Since the U.S. government backs T-bills, they're considered lower-risk investments.

The most common terms for T-bills are for four, eight, 13, 17, 26 and 52 weeks. The shorter terms to maturity differentiate them from other Treasury-issued securities.

How Treasury bills work

Treasury bills are assigned a par value (or face value), which is what the bill is worth if held to maturity. You buy bills at a discount — a price below par — and profit from the difference at the end of the term.

While T-bills don’t pay interest like other Treasurys, the difference between your discounted price and the par value is essentially the "interest" earned. It's as simple as that — you gave the government a short-term loan by buying T-bills, and they paid you back with "interest" at the end of the term.In other words, T-bills pay no interest payments leading up to their maturity.

T-bill purchase example

To see how a Treasury bill purchase works, let's look at a Treasury bill auction. On February 28, 2024, the Treasury held an auction for a 17-week Treasury bill with an issue date of March 5 and a maturity date of July 2. The price per $100 amounted to about $98.27, or an annualized discount rate (shown as "high rate" in TreasuryDirect) of 5.225%.

If you set your purchase price to be $1,000 for this auction, you would have paid $982.73 on March 5. On July 2, you'd receive $1,000, earning $17.27 on your investment.

Now, if you were to theoretically reinvest in this T-bill for one year, you could arrive at an annual investment rate for your 17-week T-bill based on the actual purchase price of $982.73.

To explore how this works, use our T-bill calculator below.

Treasury bill rates compared to other Treasury securities

Treasury bills, notes and bonds are three types of U.S. debt securities that mainly differ in the length of maturity (shortest to longest). Treasury notes are intermediate-term investments that mature in two, three, five, seven and 10 years. Treasury bonds mature in 20 or 30 years. Unlike T-bills, Treasury notes and Treasury bonds pay interest every six months. Below are the current rates for various Treasury securities:

Are Treasury bills a good investment?

Ultimately, whether Treasury bills are a good fit for your portfolio depends on your risk tolerance, time horizon and financial goals.

T-bills are known to be low-risk short-term investments when held to maturity since the U.S. government guarantees them. Investors owe federal taxes on any income earned but no state or local tax.

However, Treasury bills also typically earn lower returns than other debt securities and even some certificates of deposit. As a result, Treasury bills may be most advantageous to conservative investors who are less willing to take risks but still want to earn a little interest.

What causes Treasury bill rates to fall?

Keep in mind that economic growth or decline, interest rates and inflation can affect Treasury bill rates. Here's how it works.

Demand for T-bills often drops during inflationary periods if the discount rate offered doesn't keep pace with the inflation rate.

The Federal Reserve sets lending rates between banks. It can lower the rate to encourage lending or raise the rate to contract the amount of money in the economy. When interest rates are high, as in 2023, investors tend to look toward higher-yield investment options and away from lower-yield Treasury bills.

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