Treasury Bills (T-Bills)

Treasury bills are the shortest-dated obligations the US government issues. They are sold at a discount to face value and redeemed at par, providing a yield-to-maturity without a coupon payment. A 4-week T-bill might sell for $9,990 and mature at $10,000; the $10 profit is your interest. For investors seeking the safest, most liquid short-term investment with minimal price volatility, T-bills are the answer.

Key takeaways

• T-bills are issued in 4-, 8-, 13-, 17-, 26-, and 52-week maturities and sold via competitive and non-competitive auctions
• They are priced on a discount basis: the difference between the purchase price and face value is your yield
• Real yields on T-bills can turn negative when inflation exceeds the discount rate
• T-bills are ideal for cash reserves, emergency funds, and the short end of bond ladders
• The T-bill yield curve (4-week to 52-week) anchors overnight and short-term lending rates across the economy

How T-bills work: the mechanics

When the US Treasury holds a T-bill auction, it announces a quantity of bills to be sold and a maturity date. Investors then submit bids. For a non-competitive bid (available to retail investors through TreasuryDirect), you specify the quantity and accept whatever discount rate the auction yields. For competitive bids (used by banks and dealers), you bid a specific discount rate; the highest bids win allocation.

The discount rate is quoted differently than a bond yield. If a 13-week (91-day) T-bill auction produces a discount rate of 5.25%, the implied price is not simply par minus 5.25% per year. Instead, the formula is:

Price = 10,000 × (1 - discount_rate × days_to_maturity / 360)

For a 91-day bill at 5.25% discount: Price = 10,000 × (1 - 0.0525 × 91 / 360) = 10,000 × (1 - 0.01326) = $9,867.40

You buy the bill for $9,867.40, hold it for 91 days, and receive $10,000 at maturity. Your profit is $132.60 on a $9,867.40 investment, which annualizes to roughly 5.46% (the Treasury yield equivalent, or investment yield). This distinction—discount rate versus investment yield—matters when comparing T-bills to other money-market instruments.

T-bill auction schedule and sizes

The Treasury holds regular auctions on a predictable schedule. Every Monday (or Tuesday if Monday is a holiday), the Treasury announces the upcoming week's auctions. Auctions typically include:

• 4-week bills (Wednesday)
• 8-week bills (Wednesday)
• 13-week bills (Monday and Thursday)
• 26-week bills (Monday and Thursday)
• 52-week bills (Monday and Thursday, or occasionally skipped)

The total amount issued varies week to week but routinely reaches $120–150 billion per week across all T-bill maturities. This enormous volume ensures that T-bills are the most liquid short-term security on the planet. You can buy a $100,000 position without moving the market and sell it just as easily if you need cash before maturity.

Yield curve for T-bills: the money-market view

The T-bill yield curve—a plot of 4-week, 8-week, 13-week, 26-week, and 52-week yields—is a barometer of short-term interest-rate expectations and credit risk perception. In normal times, the curve slopes upward: 52-week bills yield more than 4-week bills. But when investors expect rates to fall sharply (as before a recession or when the Federal Reserve begins cutting rates), the curve flattens or inverts. In 2023, as the Fed signaled an end to rate hikes, investors pushed 4-week bill yields above 52-week yields, expecting future rates to be lower.

The Federal Reserve's benchmark interest rate—the federal funds rate, the rate at which banks lend to each other overnight—is heavily influenced by T-bill yields. When the Fed raises its target rate, T-bill yields follow within days. When the Fed cuts, T-bill yields collapse. This transmission is so tight that the 4-week T-bill is sometimes called the "bellwether" of Fed policy.

Buying T-bills directly: TreasuryDirect

The simplest and cheapest way to buy T-bills as a retail investor is through TreasuryDirect.gov, the US Treasury's platform for direct sales to individuals. You create an account (free, with a Social Security number or employer ID), link a bank account, and submit a non-competitive bid during an auction. You pay no fees, no commissions, and no bid-ask spread. The minimum purchase is $100; you can buy in $100 increments up to a limit (typically $5 million per auction per security per person).

When the auction closes, the Treasury notifies you of the yield and the price. Your bank account is debited for the purchase price, and at maturity, your account is credited with $10,000 per $10,000 par you bought. The process is so frictionless that many investors use T-bills as a cash substitute: instead of letting money sit in a 0.5% savings account, they buy rolling 4-week or 13-week bills, earning 5% or more (as of 2024).

T-bills through brokerages

If you prefer a brokerage (Vanguard, Fidelity, Schwab, Interactive Brokers), you can buy T-bills in the secondary market or at auction. At a brokerage, you also face no fees, but you will pay a bid-ask spread (typically $0.25 per $10,000 contract, or 0.0025%). For short-term holdings, this spread is negligible. For very large positions, you might negotiate with a dealer, but most retail investors never deal with dealers directly.

The advantage of a brokerage is flexibility: you can sell before maturity if you need cash. TreasuryDirect does not allow early sales; you must hold to maturity. If you sell a T-bill early at a brokerage, you realize a gain or loss if interest rates have moved. For example, if you buy a 26-week bill at 5% and interest rates drop to 4% two weeks later, you can sell it at a small gain. If rates rise, you'll take a small loss. Over such short periods, these losses and gains are typically tiny—a fraction of a percent—but they exist.

T-bills in portfolios: cash and short-term reserves

T-bills serve three main roles in investor portfolios. First, they are a cash reserve. Many investors hold 3–6 months of living expenses in T-bills or T-bill funds, instead of low-yield savings accounts. With T-bill yields at 5% (as they have been in 2024), a $30,000 emergency fund earns roughly $1,500 per year, versus a few cents in a bank savings account.

Second, they are a buffer for rebalancing and opportunistic buying. A 60-40 investor might keep 2–5% of the portfolio in T-bills, using this allocation to buy stocks or bonds when prices fall. This approach lets you stay invested in a down market without having to sell winners to buy dips.

Third, they are the short end of a bond ladder. An investor might buy a 4-week bill, 13-week bill, 26-week bill, 52-week bill, 2-year note, 5-year note, and 10-year bond. As each bill or note matures, the investor reinvests the proceeds. Over a full market cycle, the ladder ensures you're selling bonds at different times, averaging into your exit prices and reducing the risk of selling everything at the worst moment.

Tax treatment of T-bills

T-bill interest is exempt from state and local income tax but subject to federal income tax. If you live in a high-tax state like California (13.3% top rate) or New York (10.9%), the state-tax exemption is meaningful. A 5% yield on T-bills becomes more valuable than a 5% yield on a corporate bond in the same state.

For tax-deferred accounts (401(k), IRA, HSA), T-bill taxation is irrelevant—you pay tax on withdrawals, not on the T-bill income itself. For taxable accounts, you'll owe federal income tax on the $132.60 profit (in the earlier example) in the year the bill matures, even though you never received a coupon check.

Real yields on T-bills and inflation dynamics

As of 2024, 4-week T-bills yield around 5.3% and inflation expectations are around 2.5%, implying a real yield of roughly 2.8% per year. This is attractive: you're earning a positive real return on the safest asset in the world. But this hasn't always been true. From 2008 to 2021, T-bill yields were near zero while inflation sometimes exceeded 3%, resulting in deeply negative real yields. Investors faced a choice: earn a negative real return on T-bills or take on stock or credit risk for positive real returns.

This dynamic matters for your allocation. When real yields on T-bills are positive (above 2% real), they compete seriously with stocks. When they're negative, stocks become far more attractive on a relative basis. Historical data from Vanguard and other sources shows that positive real yields on short-term bonds correlate with lower long-term stock returns, while negative real yields correlate with higher returns—the market compensates you for seeking return elsewhere when safe assets offer poor real returns.

Risks: interest-rate risk and rollover risk

T-bills carry two key risks. The first is interest-rate risk, though it is minimal over short time horizons. If you hold a 26-week bill and interest rates rise 1% before maturity, your market value falls by roughly 0.1–0.2% (a 26-week duration of roughly 0.25 years). Over such a short period, this loss is negligible. But if you hold a 52-week bill and rates rise 2%, your market value falls by roughly 1%. This is why T-bills are considered money-market instruments (minimal price risk) rather than bonds.

The second risk is rollover risk: the risk that when your T-bill matures, rates have fallen and you're forced to reinvest at a lower yield. This is a real concern in a declining-rate environment. In 2022, a 52-week T-bill yielded over 4%. By 2023, new 52-week bills yielded under 5% (then rose again in 2024). An investor who bought 52-week bills in late 2022 and needed to reinvest in late 2023 faced a lower yield. To mitigate this, investors use ladders: holding bills of different maturities so some portion of the portfolio reinvests every few weeks, averaging the yields you capture.

T-bill funds and ETFs

For investors who want the simplicity of automatic reinvestment and daily liquidity, T-bill funds are an option. Vanguard Treasury Money Market Fund (symbol VMFXX) holds a portfolio of T-bills and short-term Treasuries with an expense ratio of 0.11%. Fidelity Government Money Market Fund (SPAXX) has similar mechanics. These funds maintain a net asset value of $1 per share and aim to deliver T-bill-equivalent yields with no effort on your part.

The trade-off versus buying individual T-bills directly is tiny: you pay a small expense ratio (0.10–0.20%) instead of buying for free at TreasuryDirect. But you gain automation and instant liquidity. If you check T-bill yields and they're attractively high, a T-bill fund might be simpler than rolling individual positions every few weeks.

T-bills during Fed tightening and easing cycles

T-bill yields respond immediately to Federal Reserve policy shifts. In 2022, the Fed began raising the federal funds rate from near zero, and 4-week T-bill yields climbed from 0.05% in March to over 5% by September. Investors who anticipated this shift could have bought 52-week bills early in the year and locked in rising yields as the Fed moved. Conversely, in 2024, as the Fed signaled it might cut rates in the second half of the year, 4-week bill yields began to compress relative to longer maturities, anticipating lower future short rates.

Sophisticated investors monitor Fed speeches, economic data, and market pricing to predict rate moves. For most people, the simplest approach is to buy rolling short-term bills—4-week or 13-week—and reinvest as they mature. This approach captures whatever the current market is offering without trying to time the bottom.

Conclusion: the parking meter for capital

T-bills are the closest thing to money that still earns interest. They are ideal for parking capital you'll need within a year, building an emergency fund, or funding the short end of a bond ladder. In an environment of 5%+ yields (as in 2024), T-bills rival stocks as a return source once you account for volatility. The ultra-liquid, auction-based system ensures you can always buy or sell a position at tight, transparent pricing. Whether you use TreasuryDirect or a brokerage, T-bills should be a core holding in any investor's toolkit.

Decision tree

Related concepts

• What Government Bonds Are
• Treasury Notes

Next

Treasury notes are the intermediate cousins of T-bills, with maturities from 2 to 10 years and coupon payments every six months. Where T-bills are the money market, notes are the workhorse of bond portfolios.