Why Treasury Bills Are Always a Worthwhile Investment

The Federal Reserve raised interest rates three times in 2017, and is on track to raise rates a total of four times in 2018. The effective rate is up to a range between 1.75 and 2 percent, and will probably hit a bench mark range of 2.25 to 2.5 percent by the end of the year.

What does that mean for you? If your money is in your local bank, it probably means diddly-squat. You're better off if your money is in an online savings account — mine boosted rates by a quarter of a percentage point — but you're still not getting a market rate. And it makes sense. Your bank already has your money, so why would they pay more?

What you need when rates are rising is something that responds quickly to changes in the market. Luckily, there's an instrument out there that does just that: Treasury bills. (See also: Interest Rates Are Rising: Here's Where to Keep Your Cash)

What are T-bills?

A Treasury bill is a short-dated obligation backed by the Federal government. They are generally considered the safest way to hold dollars. (The government, after all, has the printing presses that let them print the money they need to pay you — and they can do so legally.) Selling Treasury bills is the main way the Federal government borrows money to fund projects such as highway repairs and building schools.

How T-bills work

Treasury bills come in several standard terms: four weeks, 13 weeks, 26 weeks, and 52 weeks.

Instead of paying face value and then getting an interest payment at maturity, you buy them at a discount, and the interest is paid at maturity. For example, if you bought a $100 T-bill for $97.70, you'd get back $100 upon maturity.

The rates are set by auction, and all the biggest players in the financial markets — banks, brokerage firms, large corporations (and small ones), hedge funds, and foreign central banks — buy T-bills on a regular basis. These major financial institutions participate in the auction, but they only want to win if the result is a good rate. (Otherwise they have lots of other ways to hold dollars.) You can participate in the auction as well, but as an individual investor, you don't have to worry about bidding. You can enter a "noncompetitive" bid, which guarantees you the T-bills you want at the top rate the Treasury pays that week on that bill.

How you can buy them

You can buy T-bills directly from the U.S. Treasury through a TreasuryDirect account. Setting up a TreasuryDirect account works just like setting up an internet savings account. You need to link a checking or savings account in order to receive the payment when your T-bill matures.

By modern standards, the TreasuryDirect website is kind of clunky (it's pretty much the same as it was 10 years ago), but it works just fine.

You can order a bill to be purchased at the next auction. The cost will be deducted from your linked account about two days later, and the face value will be paid into your account the day the bill matures. You can also set up a bill to be automatically reinvested, in which case your account gets credited with the discount on the next bill.

The Treasury maintains a page where you can see the rates at previous auctions. You can also see daily interest rates of Treasury securities.

If you know you're not going to need the money for three, six, or 12 months, you can buy a longer-term bill — which will typically pay a higher rate of interest.

There are even longer-term securities, with terms varying from two years out to 30 years. There are also inflation-protected securities that guarantee the face value of your security keeps up with inflation. Depending on your investment needs, one of those might be the right investment for you. (See also: How to Use T-bills to Safely Boost Your Emergency Fund)

Things to consider before buying a T-bill

Anytime you have money sitting in your account that you're not going to need for at least four weeks, you can use it to buy a T-bill. As the four-week mark approaches, check if you need the cash. If so, you don't need to do a thing, as the money will show up in your linked account on the maturity date.

However, T-bills are not quite as flexible as an internet savings account, for a few reasons:

  • T-bills are auctioned on specific dates, so if you just missed an auction, you might have to wait to buy your T-bill.
  • T-bills are sold in increments of $100, so you can't just invest any odd amount.
  • Getting your money back early is hard. There used to be a way to sell from within TreasuryDirect (for a $45 fee), but that no longer exists. Instead, you have to transfer the security to a brokerage account and then have the broker sell it for you.

A TreasuryDirect account isn't the only way to buy Treasury securities; any broker (or friendly banker) can buy them for you. In addition to selling your T-bill early, a broker could also accept your T-bill as security for a loan — which might be a cheaper way of accessing your money early.

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Guest's picture
Jonathan Ploudre

I have to say that if you like the security of a treasury bill, I'd suggest a T-bill based mutual fund like at Vanguard. There is a small expense fee but you get complete liquidity of your money. So if you actually need the money for a big emergency, you can get to all of it. Worse case scenario for above, you'd have to wait 12 and 25 weeks to get the second half of your money.

Philip Brewer's picture

It's possible to sell a t-bill out of a TreasuryDirect account, if you have to. You get the market rate (so you're no longer guaranteed to get face value) and there's a fee. (Although it's cheap compared to getting a broker to do it, it can be a large percentage of the money you're getting, especially if your emergency fund is small.)

Still, you're generally right, and that's why I only keep half my emergency fund in the t-bills. For a large class of emergencies (such as losing a job), you don't really need the money right now, you just need to be really, really sure the money will be there when you do need it. You need to make a judgement call about the kinds of emergencies you might face.

There are two problems with using a mutual fund. First, even a low-cost fund can eat up a good bit of the total return, because the interest rates on cash are often low. Second, you lose some of the biggest advantage--the safety of the investment--because you no longer own a direct obligation of the US government. Instead, the mutual fund owns a direct obligation of the US government and you own a share in the mutual fund. I doubt if that makes much difference in practice, but if you don't care about that tiny increment in safety, you'd probably get about the same return in an on-line bank.

Guest's picture

Just a minor correction. The US Government can not legally print money. This is all done through the Federal Reserve System at the request of the Treasury. The Fed can even deny the request (I don't know if they ever have).

From the Fed's FAQ:
"As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms."

Another (very funny) quote:
"Although they are set up like private corporations and member banks hold their stock, the Federal Reserve Banks owe their existence to an act of Congress and have a mandate to serve the public. Therefore, they are not really "private" companies, but rather are "owned" by the citizens of the United States."

This is complete bull of course - each regional bank (there are 12) is run as a private corp and compete with the other banks for contracts from the Treasury.

Further down this is backed up by the following:
"Are Federal Reserve Bank employees considered government employees?

No. Employees of the Federal Reserve Banks are not government employees. They are paid as part of the expenses of their employing Reserve Bank."

Each bank is also responsible for certain specific tasks, for example the Dallas FRB is one of the banks which is responsible for the destruction of old currency.


Philip Brewer's picture

But I would note that the Bureau of Engraving and Printing is part of the Treasury and not part of the Federal Reserve. It may be that the Federal Reserve is their only legal customer at the moment, but Congress could change that at any time.

In any case, I was treating the government as a whole. The constitution gives Congress both the power to tax and the power to issue money. They may delegate the different pieces of those powers to various different institutions, bureaus, and services, but I have considerable faith that they'll do whatever taxing and printing is necessary to make good on my treasury bills.

Guest's picture

From the US Treasury FAQ:
"Both United States Notes and Federal Reserve Notes are parts of our national currency and both are legal tender. They circulate as money in the same way. However, the issuing authority for them comes from different statutes. United States Notes were redeemable in gold until 1933, when the United States abandoned the gold standard. Since then, both currencies have served essentially the same purpose, and have had the same value. Because United States Notes serve no function that is not already adequately served by Federal Reserve Notes, their issuance was discontinued, and none have been placed in to circulation since January 21, 1971."

You are correct the BEP prints all money, but it is done solely at the request of the Fed, as described in Section 16 of the Federal Reserve Act. There are many who feel that this is unconstitutional, but it has never (to my knowledge) been challenged. Even if it has been challenged, obviously it wasn't successful.

You are also correct that congress could bring in an alternative to the Fed at any time, but I really don't see that happening. They are to invested in it at this point.

Anyway, none of this is meant to detract from your post, which was great.


Guest's picture

"You buy them at close to face value, and then they pay interest twice a year until they mature, at which point you get your last interest payment and your money back."

This seems like it might suggest that the interest gets paid out instead of reinvested. If so, does that mean that you lose out on the compounding of this interest?

Philip Brewer's picture

The issue you're talking about is real.  Bond specialists refer to it as "reinvestment risk":  the risk that, when you go to reinvest the interest payments, you end up having to invest at a lower rate.  (To that, of course, you have to add the "lazy investor risk" and "spendthrift investor risk" that you'll either not get around to investing the money at all, or worse yet, just spend it.  The bond specialists would never do such a thing, so they don't have a name for it.)

If interest rates are higher when you receive your interest payments, you're golden:  reinvest the money at the higher rate.  (Of course, you still have to actually do it.)  Similarly, if your plan is to spend the money (because you're already retired, let's say, and the interest is what you're planning to live on), then getting the interest paid out is just what you want.

If you definitely want to be compounding, and you're concerned that future rates might be lower, there's another option called a zero-coupon bond.  It doesn't pay semi-annual interest payments.  Instead, you buy it at a big discount to face value and then it pays off at face value at maturity.  The result is guaranteed compounding.  I'm not sure you can buy those directly in a Treasury Direct account, although you can definitely get them through a broker.

Guest's picture

Can a company (corporation) buy t bills from the Treasury?
All the forms are set up for individuals.

thanks, Marg

Philip Brewer's picture

Yeah, the new Treasury Direct seems to be just for individuals.  The old Treasury Direct was somewhat more flexible (at least about joint ownership), but I think even it was not set up for anything but ownership by natural people.

Guest's picture

I am thinking of investing money we are saving for future car, vacation and housing downpayments in this manner, rather than going through vanguard. How do you find the interest rate on the treasury dircet web site?


Philip Brewer's picture

The rate on t-bills is determined by auction, so one of the downsides is that you don't know what rate you're going to get until after you've already bought the t-bill.  On the other hand, you're getting the rate determined at auction, so you're getting the same rate the big-time financial types are getting--it's genuinely a market rate.

You can see what the rate is on current t-bills various places.  Here's one, at Bloomberg:


The three-month and six-month bills are shown in the first two lines of the first chart.

Currently, rates on short-term government paper are terrible.  (Actually negative on 3-month bills as I type this.)  You can almost certainly do better on bank CDs right now.  That will change, as the government's borrow needs eventually push up short-term rates.  (So, if you're reading this comment months from now, be sure to check and compare rates.)

Guest's picture

What's the differance between T Bills with lets say a
(Gold Seal) or a (Red Seal) or a (Silver Seal) on them???

Philip Brewer's picture

I'm guessing that you're asking about ordinary banknotes (i.e. money), as T-bills aren't printed on paper anymore.  (They haven't been in for long time.  Their ownership is tracked electronically by the Federal Reserve.)

Almost all the ordinary banknotes that you find in circulation now are Federal Reserve Notes, but in the past there have been different kinds of banknotes, issued by the treasury (and before that, by other banks).  They generally look pretty similar, but (as you indicate) have different colored seals.  They also have different text at the top (where most of the money in your wallet currently says Federal Reserve Note).  The most common other kinds are United States Notes, Silver Certificates, and Gold Certificates.

If they're in really good shape they may be worth something to a collector of currency.  Aside from that, for practical purposes they're really just like Federal Reserve notes--they're still valid US money, worth whatever the donomination is.  Neither gold nor silver certificates can be turned in for gold or silver--the last date to do that was decades ago.

Guest's picture

how can t-bills impact on the poor and the developing countries?
l am in a part of the world where income level is low and culture of saving.

Guest's picture

Can I make a profit if I sell a T-Bill before its maturity date? If so could you include a full example to show how the profit is computed including the treatment of the remaining discount value?



Philip Brewer's picture

It is possible to make a profit selling a t-bill before maturity. In fact, it's likely--under normal conditions the yield curve is upward-sloping (meaning that shorter-term t-bills earn a lower yield), so your t-bill should grow in price slightly faster than straight-line appreciation.

I'm afraid, though, that I can't help you with the tax question.  Because the tax laws and rules change all the time, I long ago gave up trying to figure stuff out in advance, and I've never sold a t-bill before maturity myself.  So I've never had to figure it out.  Anyway, each individual tax situation is unique, so one-size-fits-all advice is rarely useful.

Guest's picture

When t-bills are returning 0% is this an indication that large funds are buying in? If so, when has this historically happened? What can the average investor learn from this?

Philip Brewer's picture

 As a response to the financial panic, the Federal Reserve started pushing interest rates down in 2007, and kept pushing them down until reaching zero in late 2008.  The Fed can control short-term interest rates because it can create or destroy money--adjusting the supply to whatever produces the interest rates it wants.

This is pretty much a unique situation historically in the United States, but other countries (in particular Japan in the 1990s) have tried what's called a "zero interest rate policy."

The average investor is pretty much stuck waiting for rates to go up.

Guest's picture

Great article! So, in todays market, if I were to buy $1000 worth of T-bills and the interest rates don't rise appreciably in the next 6 mos., approximately what would be the return on my investment? Sorry if this is a lame question!