What is a Treasury Bill?
A Treasury Bill is a U.S Government security with a very short maturity, some as short as 4 weeks and some as long as 52 weeks.
Because of their short duration, treasury bills do not pay interest like a longer term bond, but instead investors purchase the bills under par at auction or on a secondary market and receive face value for the bill at time of maturity.
Not to be confused with a Treasury Note or Treasury Bond (Or, see article here: What’s the difference?)
For example, as I write this, you can purchase a 52 week Treasury Bill for about $99.447 per $100 invested:
Below is an example of treasury bills for sale, as seen with TradeKing.
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Today, an investor who wants to buy a 52 week treasury pays $99.447 today and in 52 weeks they receive $100. This amounts to a 0.55% return on your investment.
Treasury Bills typically offer very low returns. So why buy them?
Why Investors Use Treasury Bills
Treasury Bills offer investors a risk free, short term investment with a slightly higher yield than cash.
Also, because of their short duration, treasury bills offer investors a way to hedge against a rise in interest rates compared to investments in longer term bonds(See article here: Why do bond prices go down as interest rates rise?)
For an example, consider a person saving money for a large down payment on a house. A person in this situation has a couple of concerns:
- Security of having a significant amount of cash in a bank account.
I know that I am not alone in the concern of what would happen if someone got a hold of my bank account info. This fear is compounded when I was saving for an initial down payment on a house and I had tens of thousands of dollars in there.
If you know the day you need the money for a down payment is at least a year away, you could store that money in the form of treasury bills to avoid the risk of loss from theft or erosion from inflation.
A saver could easily create a portfolio of treasury bills to all mature around the same time. If you estimate you will be buying a house 1 year from now, any money set aside today for a down payment could purchase 52 week treasury bills, a few months from now your could then start to purchase 26 week bills with additional savings, a few months later any additional savings can be used to purchase 13 week bills, etc.
- Cash sitting in a bank account earning 0% interest.
Treasury Bills will never make you rich, but on large amounts of money the interest you can earn may be worth moving money out of your 0% checking account.
At today’s historically low rates, $40,000 (a 20% down payment on a $200,000 house) invested in a 52 week Treasury bill will earn you about $55. Nothing to make your friends envy you, but considering that you are getting paid to put your money in one of the safest investment securities in the world…it beats a checking account.
- Chance of losing principal.
So we have established that treasury bills will hardly make you rich, but what alternatives are there?
You could risk the money in the stock market, which on average sees a 10% correction once per year. This means there is a significant chance that you could see a $4,000 hit on your $40,000 investment if luck is against you. So the stock market is out of the question for your house down payment.
You could invest in longer term treasury bonds for a higher yield, but because of their long maturities, you will have to sell them on the secondary market to get your cash back. And if interest rates have risen, you will have to take a loss on your principal. What was meant to be a savings vehicle for your house down payment may actually cause you to lose money. For an example of this, see our “Treasury Note” definition page, where we compare the price performance of longer term and shorter term treasury funds.
Treasury bills are a risk free investment (The United States Government cannot “run out of money”). They are unglamorous, but for those in special situations looking to stash money away safely, there are few better options.
Where to Buy Treasury Bills
Treasury Bills can be purchased on Treasury Direct in $100 increments.
Your broker may allow you access on to the secondary market. Check with your broker for more information.
Alternatives to Treasury Bills
ETFs and mutual funds that invest in Treasury Bills do exist, however the expense ratio you pay the fund negate any interest earned. But, if your money is within a brokerage account and you want it to stay there, that could be an option.
Other options include CDs (Bank certificate of deposits) and money market funds.
Additional Resources
Investors can read more about Treasury Bills on Treasury Direct’s website, here.
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