Paul Sanchez
Treasury bills, also known as T-bills, are a type of debt security issued by the US Treasury with maturities ranging from four weeks to one year. They are considered a safe investment due to their US government guarantee, which ensures zero default risk. T-bills are sold at a discount from their par value, and the interest income is exempt from state and local taxes but subject to federal income tax. While T-bills are not FDIC-insured, they are backed by the full faith and credit of the US government, making them a reliable investment option.
| Characteristics | Values |
|---|---|
| Minimum investment amount | $100 |
| Interest payments | No regular interest payments, but include built-in interest reflected in the amount paid at maturity |
| Investment risk | Zero default risk since T-bills have a U.S. government guarantee |
| Tax treatment | Interest income is exempt from state and local income taxes but subject to federal income taxes |
| Maturity | 4, 8, 13, 17, 26, and 52 weeks (alternatively, one through four, six, and 12 months) |
| Purchase process | Sold at a Treasury auction, where bidders can bid noncompetitively or competitively |
| Holding options | TreasuryDirect (direct holding system) or the Commercial Book-Entry System (indirect holding system) |
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What You'll Learn
Treasury bills are backed by the US government
Treasury bills, or T-bills, are considered an extremely safe investment as they are backed by the US government. They are debt securities issued by the US Department of the Treasury to finance government projects. T-bills are sold in auctions, where bidders purchase them at a discount from the par value, meaning the purchase price is less than the face value of the bill. For example, a 52-week T-bill worth $1000 may be purchased for $954.19667, and the investor will receive the full $1000 upon maturity. The difference is the gain in interest.
T-bills do not offer regular interest payments like coupon bonds. Instead, they include built-in interest, reflected in the amount paid when the bill matures. The interest income from T-bills is exempt from state and local income taxes but is subject to federal income taxes. T-bills are considered a low-risk investment because they have zero default risk due to the US government guarantee.
The US Treasury market is influenced by Federal Reserve (Fed) policy expectations, inflation, growth trends, bond supply expectations, and policy uncertainty. Treasury bills are available in maturities of four, eight, 13, 17, 26, and 52 weeks, or one, two, six, and 12 months. The minimum amount that can be purchased is $100, and additional amounts must be in multiples of $100.
Treasury bills can be held in one of two systems: TreasuryDirect or the Commercial Book-Entry System. TreasuryDirect is a direct holding system where investors have a direct relationship with the US Treasury. The Commercial Book-Entry System is an indirect holding system where investors hold their securities with a broker, dealer, or financial institution.
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Treasury bills are exempt from state and local income taxes
Treasury bills, or T-bills, are exempt from state and local income taxes. This is because they are issued by the federal government, and income from bonds issued by the federal government is generally exempt from state and local taxes.
T-bills are considered the lowest-risk investment because they are backed by the US economy and the government's ability to make good on any payments. They are often used as a safe haven when the market is falling and the economy is shrinking.
However, T-bills are not entirely tax-free. While they are exempt from state and local income taxes, they are still subject to federal income taxes. This means that interest income from T-bills is taxable at the federal level.
The exemption from state and local income taxes can give T-bills an advantage over other short-term, fixed-income assets, especially for investors living in high-income-tax states, such as California, Hawaii, New York, and Oregon. For example, if you are a single taxpayer in Oregon with an income of $101,000 per year and you are considering investing in a one-year T-bill with a yield of 3.58%federal tax rate for your income level is 22%, and the state income tax rate is 9.9%. After federal taxes, your net earnings from the T-bill will be 2.79%. However, if you were to invest in a certificate of deposit (CD), which is fully taxable at the state and federal levels, your net earnings would be lower at only 68.1% of the yield after taxes.
It is important to note that while T-bills are exempt from state and local income taxes, if you buy a T-bill and sell it for a profit, that profit will be taxable as a capital gain. If you hold the T-bill for more than one year, the profit will be taxed as a capital gain. If you hold it for less than a year, it will be taxed at your income tax rate.
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Treasury bills are sold at a discount to their face value
Treasury bills, or T-bills, are short-term debt obligations issued by the US Treasury Department. They are considered safe investments because they are backed by the full faith and credit of the US government.
T-bills do not offer regular interest payments as with a coupon bond, but they do include built-in interest, reflected in the amount paid when the bill matures. The difference between the purchase price and the maturity value is the interest earned by the investor. This is known as the Original Issue Discount (OID), where the difference between the discounted price at issuance and the face value at maturity represents the total interest paid in one lump sum.
The maturities available for Treasury bills are four, eight, 13, 17, 26, and 52 weeks (alternatively, one through four, six, and 12 months). When interest rates are expected to rise, longer maturity dates pay more than shorter dates. Conversely, if interest rates are expected to fall, longer maturity dates might offer lower interest rates.
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Treasury bills are transferable and can be sold in the secondary market
Treasury bills, also known as T-bills, are a safe and secure investment option as they are backed by the US government. They are also highly liquid, which means they can easily be converted into cash. T-bills are available for purchase by individual investors with a low minimum investment requirement of $100.
T-bills can be bought and sold in the secondary market, also known as the secondary bond market. This is where investors can resell their pre-owned T-bills. Major online brokers such as Fidelity, Vanguard, and Charles Schwab do not charge fees for buying T-bills on the secondary market. Buying on the secondary market is a good option if you want a T-bill that matures in 9 months, 18 months, or 4 years, as these are not available as new issues.
T-bills are issued at a discount from the par value, meaning the purchase price is less than the face value of the bill. For example, a 1-year T-bill with a face value of $1,000 and an annual yield of 5% would be purchased for approximately $950 upfront. When the T-bill matures, the investor receives the full face value of $1,000. The difference between the face value and the purchase price is the return on investment (ROI). In this case, the ROI is $50, or approximately 5.26%.
T-bills do not pay interest payments. Instead, they include built-in interest, reflected in the amount paid when the T-bill matures. The interest income from T-bills is exempt from state and local income taxes but is subject to federal income taxes.
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Treasury bills are issued in book-entry form
Treasury bills, or T-bills, are short-term debt obligations backed by the US government and sold in auctions by the US Treasury (or Department of the Treasury). They are sold at a discount to their face value, with the buyer paying less than the face value upfront and receiving the full face amount upon maturity. T-bills do not pay regular interest, but they do include built-in interest reflected in the amount paid at maturity. The interest income from T-bills is exempt from state and local income taxes but is subject to federal income taxes.
T-bills are issued in book-entry form, which means that ownership is recorded electronically rather than through the issuance of paper certificates. The US Treasury began issuing all new notes and bonds in book-entry form in 1986 with the introduction of the Treasury Direct program. This program was expanded in 1987 to include T-bills. Book-entry securities eliminate the need for paper certificates of ownership, allowing investors to trade or transfer securities without presenting a physical certificate as proof of ownership. Instead, accounting entries are changed in the books of the commercial financial institutions where investors maintain their accounts.
The Department of the Treasury issues marketable Treasury securities into the commercial book-entry system and into accounts maintained directly on the records of the Department of the Treasury. These "securities held directly with Treasury" are subject to specific terms and conditions, including those outlined in auction announcements and regulations governing the system in which the securities are held. The Treasury/Reserve Automated Debt Entry System (TRADES) rules specify the jurisdiction governing matters related to Treasury securities in TRADES or the commercial book-entry system. TRADES is based on the Uniform Commercial Code Article 8, "Investment Securities," and holders of Treasury book-entry securities in TRADES maintain their interests in a tiered system of ownership accounts.
The Uniform Offering Circular (UOC), or Title 31 CFR part 356, outlines the terms and conditions for the sale and issuance of marketable, book-entry Treasury bills, notes, and bonds to the public. The UOC, along with the auction announcement for each Treasury security auction, provides a comprehensive statement of these terms and conditions. The Department of the Treasury has issued several technical amendments to the UOC to modernize regulations, enhance clarity, and improve consistency in terminology.
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Frequently asked questions
Yes, Treasury Bills are federally insured. They are backed directly by the federal government.
Treasury Bills are considered an extremely safe investment. They offer diversification, income, and liquidity. They also have zero default risk since they have a US government guarantee.
Treasury Bills are sold at a discount from the par value, meaning the purchase price is less than the face value of the bill. They do not offer regular interest payments, but they do include built-in interest, reflected in the amount paid when they mature.
