Treasury bills, or T-bills, are short-term debt securities issued by the U.S. government. They are considered one of the safest and most liquid investments in the world, as they are backed by the full faith and credit of the U.S. government and can be easily bought and sold.
T-bills have maturities ranging from four to 52 weeks and are sold at a discount to their face value. For example, if you buy a $1,000 T-bill with a 26-week maturity for $980, you will receive $1,000 when the T-bill matures, earning an interest of $20.
T-bills do not pay regular interest payments like bonds do, but rather the interest is the difference between the purchase price and the face value. The interest income from T-bills is exempt from state and local income taxes, but subject to federal income taxes.
There are several ways to buy T-bills, depending on your preferences and goals. Here are some of the most common methods:
TreasuryDirect is an online platform run by the U.S. Department of the Treasury that allows investors to buy, hold, and redeem eligible Treasury securities directly from the government. To open a TreasuryDirect account, you need a valid Social Security number (or taxpayer identification number), a U.S. address, an email address, a web browser that supports 128-bit encryption, and a checking or savings account.
With TreasuryDirect, you can participate in Treasury auctions and buy T-bills at their original issue. You can also buy T-bills on the secondary market from other investors who want to sell them before maturity. You can choose from various terms and amounts, starting from as little as $100. You can also schedule your purchases in advance and set up automatic reinvestments if you wish.
TreasuryDirect charges no fees or commissions for buying or selling T-bills. However, it does not offer tax-advantaged accounts such as IRAs or 401(k)s. If you want to sell your T-bills before maturity, you have to transfer them to a bank or a brokerage that can execute your order.
Banks and Brokerages
You can also buy T-bills through your bank or brokerage account, either at auction or on the secondary market. Banks and brokerages may charge commissions or fees for buying or selling T-bills, so you should compare their costs before choosing one. Some banks and brokerages may also have minimum purchase requirements or limits on how many T-bills you can buy.
The advantage of buying T-bills through a bank or a brokerage is that you can hold them in a tax-advantaged account such as an IRA or a 401(k). You can also sell them more easily and quickly than through TreasuryDirect. However, you may not get the best price for your T-bills, as banks and brokerages may mark up or down the prices depending on market conditions and demand.
ETFs and Money Market Accounts
If you want more convenience and diversification than buying individual T-bills, you can consider investing in exchange-traded funds (ETFs) or money market accounts that hold T-bills or other short-term Treasury securities.
ETFs are funds that trade on stock exchanges like stocks. They typically track an index or a basket of securities that reflect a certain market segment or strategy. You can buy and sell ETFs through your brokerage account at any time during market hours. ETFs charge annual fees called expense ratios, which vary depending on the fund. Some ETFs that invest in T-bills are iShares Short Treasury Bond ETF (SHV), SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL), and Schwab Short-Term U.S. Treasury ETF (SCHO).
Money market accounts are deposit accounts offered by banks that pay interest based on the prevailing market rates. They typically invest in low-risk securities such as T-bills, certificates of deposit (CDs), and commercial paper. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per bank. They also offer more liquidity than T-bills, as you can withdraw your money at any