Treasury Bills: Safe And Liquid Investments

Treasury bills, or T-bills, are short-term securities issued by the U.S. Department of the Treasury. They are considered a safe investment because they are backed by the full faith and credit of the U.S. government, which means there is virtually zero risk of losing your initial investment. T-bills are also highly liquid, actively traded on the open market, and can be easily bought or sold in the secondary market before maturity.

Low default risk

Treasury bills, or T-bills, are backed by the U.S. government, which means there is an almost 0% chance of default. This makes them a safe investment. The U.S. government uses the money raised from issuing T-bills to fund its debt and pay expenses such as employee salaries and military equipment.

T-bills are short-term securities with maturity periods of four weeks to one year, though some have a maturity period of just a few days. They are sold at a discount to their face value, and investors receive the full face value amount when the bill matures. For example, an investor might buy a $1,000 T-bill with a discount rate of 3% that matures after 52 weeks. That means they pay $970 for the T-bill upfront and receive $1,000 ($970 plus $300) when the year is up.

T-bills are a very safe investment because they are backed by the full faith and credit of the U.S. government. The probability that investors won't get their money back is extremely low. This makes them attractive to investors during periods of economic uncertainty.

Low minimum investment

Treasury bills, or T-bills, are short-term US government debt obligations with maturities of one year or less. They are backed by the US Department of the Treasury and are considered safe investments due to their low default risk. T-bills are typically sold in denominations of $100, making them an attractive option for investors seeking a low minimum investment requirement.

The low minimum investment of $100 makes T-bills accessible to a wide range of investors. This accessibility is further enhanced by the ease of buying and selling T-bills on the secondary bond market. Investors can purchase T-bills directly from the US Treasury through the TreasuryDirect platform or from a brokerage firm, although the latter may incur a small fee.

T-bills are sold through a competitive and non-competitive bidding process during auctions. The US Treasury publishes auction schedules, which include announcement dates, auction dates, and settlement dates. Buyers must place their orders between the afternoon and night before the auction date.

T-bills are sold at a discount from their face value, also known as the par value. For example, an investor purchasing a $1,000 T-bill yielding 5% would pay $950, receiving the full $1,000 at maturity with the additional $50 as earned interest. This difference between the purchase price and the maturity value represents the interest earned by the investor.

While T-bills offer a low minimum investment requirement, investors should also consider the associated risks. T-bills offer low returns compared to other debt instruments, do not provide periodic interest payments, and may inhibit cash flow for investors who require a steady income. Additionally, T-bills are subject to interest rate risk, where their rate could become less attractive in a rising-rate environment.

Exempt from state and local income taxes

Treasury bills (or T-bills) are exempt from state and local income taxes. This is a significant advantage for investors, especially those living in high-income-tax states, as it means that they will pay less tax on the interest earned from T-bills than they would on other short-term, fixed-income assets, such as certificates of deposit (CDs).

For example, if you are a single taxpayer in Oregon with an income of $100,000 per year, and the one-year T-bill you are looking at yields 5.10%net earnings from the T-bill will be 3.876% after federal taxes (24%). However, the tax rate on a CD is higher, as it includes state taxes (9.9%). You would only keep 66.1% of the yields after taxes, so you would need the CD to yield more than 5.86% to be a better deal than the T-bill.

T-bills are also exempt from state and local taxes because the income from bonds issued by the federal government is generally exempt from these taxes.

High liquidity

Treasury bills, or T-bills, are highly liquid investments. They can be easily bought or sold in the secondary market before their maturity date. T-bills are actively traded on the open market, making them a flexible investment option.

T-bills are considered to be zero-risk investments due to their Treasury market liquidity. According to the Securities Industry and Financial Markets Association (SIFMA), there is more than $11.2 trillion in U.S. government debt outstanding, with an average daily trading volume of over $633 billion. With such a large market and high trading volume, investors looking to sell will always be able to find a buyer.

T-bills are also a good option for investors who are looking for a safe and secure investment with a short-term maturity while parking their money for a short period. The U.S. Department of the Treasury issues T-bills to raise cash to fund the federal government's spending when there is a budget deficit. T-bills are generally held until the maturity date, but they can also be cashed before maturity.

T-bills are sold at a discount from their face value and mature at face value. The difference between the purchase price and the maturity value is the interest earned by the investor.

Short-term maturity

Treasury bills, or T-bills, are a good option for investors looking for a safe and secure investment with a short-term maturity. T-bills are short-term U.S. government debt obligations backed by the U.S. Department of the Treasury and have a maturity of one year or less, with terms ranging from four to 52 weeks.

T-bills are typically sold in denominations of $100, but can reach a maximum denomination of $5 million in non-competitive bids. They are issued at a discount from the par value, or face value, and are usually held until the maturity date or cashed before maturity. When the bill matures, the investor is paid the face value of the bill, which includes the interest accrued.

The short-term maturity of T-bills offers several benefits to investors. Firstly, it allows investors to park their money for a short period without tying up their funds for a long time. This flexibility is advantageous, especially for those who prefer to have some flexibility with their investments. Secondly, the short maturity term of T-bills makes them a good option for investors seeking a safe and secure investment. The U.S. government backs these securities, guaranteeing the return of the initial investment, making them a zero-risk investment option.

Additionally, T-bills can be purchased in smaller amounts compared to other investments, making them more accessible to individuals with limited funds. For example, with a minimum investment of $100, investors can purchase a T-bill and earn a better return than a regular savings account.

While T-bills offer the advantage of short-term maturity, it is important to consider the potential drawbacks. One of the main disadvantages is the relatively lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds, or stocks. T-bills may not be suitable for investors seeking significant gains in their portfolio.

In conclusion, T-bills are a conservative investment option that provides investors with a safe and secure short-term maturity. They are ideal for those seeking a low-risk avenue to park their funds temporarily while earning a modest return. However, investors seeking higher returns may need to explore other investment options.

Frequently asked questions