Treasury Bills Overview

Treasury Bills (T-Bills)

• Treasury bills are short-term debt securities issued by the U.S. Department of the Treasury.
• They are considered to be among the safest investments, as they are backed by the full faith and credit of the U.S. government.
• T-bills are issued with maturities of 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks.
• They are sold at a discount from their face value, and the difference between the face value and the purchase price represents the investor's return.
• Investors purchase T-bills and hold them until maturity, at which time they receive the face value.

How T-Bills Work

• T-bills are sold in denominations of $100, $1,000, or multiples of these amounts.
• Auction procedures are used to determine the price.
• There are two primary types of auctions: competitive and non-competitive.
• In a competitive bid, investors submit bids specifying the desired price and the amount of T-bills they want to purchase.
• In a non-competitive bid, investors indicate the amount of T-bills they want to buy at the price determined by the highest competitive bid.

Characteristics of T-Bills

• Low risk: Backed by the full faith and credit of the U.S. government.
• Low return: Yields are generally lower than other securities with similar maturities and risk profiles.
• Liquid: Easily bought or sold in the secondary market.
• Minimal paperwork: Investors do not receive interest payments during the holding period. This simplification of the transaction process creates relative ease for investors.
• Fixed income security: Offer a fixed rate of return calculated off the difference between the purchase price and the face value.
• Marketability: Highly marketable securities that can be traded in the secondary market before maturity.

Types of T-Bills

• 4-week T-bills are sometimes referred to as "short-term" T-bills.
• 8 week T-bills are also sometimes classified as "short-term" T-bills.
• As time to maturity increases, returns typically increase. Some examples include 13 week, 26 week, and 52 week T-bills.
• Investors should carefully consider the various maturities as these affect yield characteristics.

Advantages of T-Bills

• Low risk: A relatively secure investment.
• Liquidity: Easy to buy or sell in the secondary market.
• Relatively easy to understand: The structure and operation are generally straightforward, making it accessible to a broader segment of investors.
• Minimal administrative requirements: Investors do not have to manage interest payments.
• A wide range of maturities available: Cater to varying investment needs and time horizons.

Disadvantages of T-Bills

• Lower yields: Returns tend to be lower compared to other investments.
• Less flexibility compared to other instruments: Maturities are limited, and investors must hold until maturity.
• Discount-based return: Investors receive the face value at maturity, and the difference between the face value and the purchase price is the yield.

Considerations for Investors

• Time horizon: Investors looking for short-term investments would likely find T-bills suitable investments to help reach their needs and goals.
• Risk tolerance: T-bills are a very low-risk investment.
• Investment goals: T-bills are attractive to investors whose goals and preferences align with a simple and relatively secure investment strategy.
• The secondary market for T-bills can be an efficient method to trade them before maturity.
• The maturity cycle offers a mix of short-term, mid-term, and long-term investment options.