Treasury Bills, commonly known as T-Bills, are one of the safest and most widely used fixed income securities. These short-term government-issued instruments are an excellent option for investors looking for low-risk and highly liquid investments. This guide will walk you through what T-Bills are, how they work, their benefits, and how you can invest in them.

What Are Treasury Bills (T-Bills)?

T-Bills are short-term debt instruments issued by the government to finance public expenditures. They are considered one of the safest investments since they are backed by the full faith and credit of the government.

Key Features of T-Bills:

  • Short-Term Maturity: T-Bills have maturities ranging from a few days up to one year (e.g., 4-week, 13-week, 26-week, and 52-week bills).
  • Zero-Coupon Bonds: They do not pay periodic interest; instead, they are sold at a discount and redeemed at face value upon maturity.
  • Highly Liquid: They can be easily bought and sold in the secondary market, making them a flexible investment option.
  • Low Risk: Since they are government-backed, they carry minimal default risk.

How Do Treasury Bills Work?

Unlike traditional bonds, T-Bills do not provide periodic interest payments. Instead, they are issued at a discount to their face value, and investors earn a return by receiving the full face value upon maturity.

Example:

  • Suppose you buy a 13-week T-Bill with a face value of $1,000 at an auction for $980.
  • When the T-Bill matures, you receive the full $1,000.
  • Your profit is $1,000 - $980 = $20, which represents your earned interest.
  • The effective yield depends on the discount rate and the holding period.

How Returns on T-Bills Are Calculated

The return on T-Bills is determined using the discount yield formula:

Yield = [(Face Value - Purchase Price) / Purchase Price] * (360 / Days to Maturity)

For example, if you purchase a T-Bill with a face value of $1,000 for $980, and it matures in 90 days, the yield would be:

Yield = [(1000 - 980) / 980] * (360 / 90) = 8.16%

This simple formula helps investors compare returns across different T-Bills and determine the best investment choice.

Benefits of Investing in T-Bills

1. Safety & Security

  • Since T-Bills are issued by the government, they carry virtually no default risk, making them a safe investment option.

2. Liquidity

  • T-Bills can be easily sold in the secondary market before maturity, allowing investors to access their funds if needed.

3. Predictable Returns

  • Investors know their exact return at the time of purchase, as the discount price determines the yield.

4. Low Minimum Investment

  • Investors can purchase T-Bills in small denominations, making them accessible to retail investors.

5. No Interest Rate Risk (If Held to Maturity)

  • Unlike longer-term bonds, T-Bills are less affected by interest rate fluctuations due to their short maturities.

Risks Associated with T-Bills

1. Lower Returns

  • Since T-Bills are low-risk investments, they generally offer lower returns compared to corporate bonds or stocks.

2. Inflation Risk

  • If inflation rises faster than the yield on T-Bills, the purchasing power of your returns may be eroded.

3. Opportunity Cost

  • Investors might miss out on higher returns from other investments such as stocks, corporate bonds, or real estate.

Case Study: How Rising Yields Led to a Bank Collapse

In 2023, Silicon Valley Bank (SVB), a major U.S. bank, collapsed due to its exposure to U.S. Treasury securities, including T-Bills. While T-Bills themselves are considered safe, SVB held large amounts of these securities during a period of rising interest rates. As the Federal Reserve increased interest rates, the value of SVB’s T-Bill holdings fell. When the bank needed cash, it had to sell these securities at a loss, leading to a liquidity crisis and eventual bankruptcy. This case highlights the interest rate risk associated with holding T-Bills if they are not held to maturity.

How to Invest in Treasury Bills

Investors can buy T-Bills through multiple channels:

1. Government Auctions

  • In many countries, T-Bills are sold through online auctions conducted by the central bank or the treasury department.

2. Brokerage Accounts

  • Investors can purchase T-Bills through brokers who participate in government auctions or trade them in secondary markets.

3. Mutual Funds & ETFs

  • Investors can gain exposure to T-Bills by investing in money market funds or fixed income ETFs that hold government securities.

Conclusion

Treasury Bills are a great choice for conservative investors looking for safe, short-term investment options. Their high liquidity, government backing, and predictable returns make them an attractive option for parking idle cash or balancing an investment portfolio. However, investors should consider inflation risk and the potential for higher returns in other asset classes before committing all their funds to T-Bills.

Next Topic: Understanding Yield Curves & Interest Rates