T-bills are obligations of the U.S. Treasury and are widely used for short-term cash management because of their high credit quality and active secondary market.
Key Takeaways
- Short maturity: T-bills mature in one year or less.
- No traditional coupon: Return generally comes from buying below face value and receiving par at maturity.
- Marketable security: Investors can hold to maturity or sell before maturity.
- Federal tax treatment differs from state tax: Treasury interest is subject to federal income tax but generally exempt from state and local income taxes.
How Treasury Bills Generate Return
Treasury bills are typically sold at a discount from face value. The investor receives face value when the bill matures, and the difference represents interest.
T-Bill Maturities and Auctions
U.S. Treasury auctions regularly offer bills in several short maturities. Cash-management bills can also be issued for irregular terms when financing needs require them.
Investors can buy new issues through TreasuryDirect or through banks and brokerages that participate in the Treasury market.
Maturity choice matters because shorter bills return cash sooner, while longer bills lock in the auction yield for more time and expose the investor to more reinvestment timing.
Competitive vs. Noncompetitive Bids
At auction, noncompetitive bidders agree to accept the rate or yield determined by the auction and are assured an award up to applicable limits. Competitive bidders specify the rate or yield they are willing to accept and can receive less than requested or no allocation.
Individual investors using TreasuryDirect commonly use noncompetitive bids.
Treasury Bills vs. Notes and Bonds
| Security | Typical maturity structure | Interest pattern |
|---|---|---|
| Treasury bill | One year or less | Generally issued at a discount; no regular coupon |
| Treasury note | More than one year through 10 years | Fixed interest paid every six months |
| Treasury bond | Long-term, generally more than 10 years | Fixed interest paid every six months |
Price Risk, Liquidity, and Cash Management
An investor holding a T-bill to maturity knows the maturity value, assuming the Treasury pays as promised. Selling before maturity introduces market-price risk because prevailing short-term rates can change.
Because their maturities are short, T-bills generally have less interest-rate sensitivity than longer-term Treasuries.
Even so, investors who sell before maturity can receive more or less than their original purchase price, especially when short-term rates change quickly.
Liquidity and Cash Management
Secondary-market trading in T-bills is deep, and the securities are commonly used by individuals, institutions, and cash-management funds. Their short maturities can make them useful for money that does not need the daily accessibility of a bank account.
Tax Treatment and When T-Bills Can Fit
Interest on marketable Treasury securities is subject to federal income tax but generally exempt from state and local income taxes. Investors should distinguish that treatment from tax-exempt municipal securities.
Broker or Treasury reporting can help with the federal return, but investors remain responsible for reporting taxable Treasury interest correctly.
When T-Bills Can Fit
T-bills can fit short-term reserves, planned future expenses, or portfolios seeking high-quality short-duration exposure. Their main tradeoff is reinvestment risk: when a bill matures, the next available rate may be lower.
A maturity ladder can spread reinvestment dates across several bills, reducing the need to place the entire balance into one future rate environment.