If you’re looking for a way to earn guaranteed interest payments with virtually no risk, then you may want to consider investing in T-bills.
T-bills or “treasury bills” are short-term bonds issued by the U.S. government. Just like bank CDs (certificates of deposit), these investments pay a pre-determined rate of interest after they mature which can be as short as 4 weeks. However, T-bills are regarded as being even safer than CDs because they’re backed by the full faith of the U.S. government.
As of June 2023, T-bills are currently paying out APRs above 5.0%. That means an investment of $10,000 could yield an easy $500 after one year. To take advantage of these incredibly attractive rates (before interest begins to change direction), here’s what you need to know about investing in T-bills.
What is a T-Bill?
A T-bill is just another short-term instrument of debt that the U.S. Treasury uses to raise capital for government spending. In exchange for lending them your money, you’ll be paid a competitive rate of return once the T-bill matures.
Because of their short-term nature, T-bills are updated regularly to be on par with the current federal funds rate. That’s great news for anyone with spare cash because, since 2022, the U.S. Federal Reserve has raised interest rates to some of the highest levels in over 15 years.
T-bills are sought from every type of investor such as your next-door neighbor to billionaire Warren Buffett. Unlike other investments (such as I-bonds), there’s no practical upper limit to how many T-bills you can buy at a time. Investors can purchase them in denominations of as little as $100 to as much as $10 million.
When Do T-Bills Mature?
T-bills are issued with the following maturity terms:
- 4 weeks
- 8 weeks
- 13 weeks
- 17 weeks
- 26 weeks
- 52 weeks
The APR quoted with each T-bill is based on how much interest you’ll receive over the course of one year regardless of the T-bill’s actual maturity. Most financial investments use APR because it makes it easier to compare options.
This is important to keep in mind because if you buy a T-bill with a maturity shorter than 52 weeks, then you may receive a smaller interest payment than you might be expecting. For example, someone who puts $10,000 into a T-bill that carries a 5.0% APR might expect to earn $500 in interest. However, if that T-bill matures in 26 weeks, then you’d actually receive half of that amount: $250.
What Are the Pros of Investing in T-Bills?
There are a lot of good reasons to buy T-bills.
Guaranteed Returns
Unlike stocks and bonds, investors don’t need to worry about T-bills. They are safer than CDs since the Treasury has never defaulted on its debt, so you’ll always make your money back. That’s reassuring considering longer-term bonds must sometimes be sold at a discount as the market fluctuates.
Low Minimum Investment
You don’t need much money to start investing in T-bills. Investors can start buying them with as little as $100.
Reduced Taxes
T-bills are exempt from state and city taxes. Investors need to only report them on their federal returns.
What Are the Cons of Investing in T-Bills?
As with any investment, T-bills aren’t completely foolproof. Here are some reasons why they may not be the most ideal investment.
Poor Liquidity
When you invest in a T-bill, you’re essentially locked in until it matures. If you need your money back early, then your only alternative is to sell it at a potential discount on the secondary market.
May Not Be as Attractive
While T-bills tend to follow the federal funds rate, they may not be as competitive as the interest rates paid by banks on CDs. CDs can also be opened for as long as 5 years, giving you a chance to capture that interest rate for a greater period of time.
Interest Rate Risk
Because T-bill interest rates are tied to the federal funds rate, they are susceptible to change over time. While you might get a great rate today, there’s no guarantee that a year or even two years from now you’ll be able to continue receiving that same great return.
For that reason, they’re a great place to park short-term cash or your emergency fund. However, as a long-term prospect, stick to assets like stocks that have higher long-term growth potential.
How Do You Invest in T-Bills?
Investors can purchase T-bills using three main ways.
Treasury Direct
The most straightforward method is to purchase them from the U.S. Treasury’s online platform: Treasury Direct. Though their website is not exactly user-friendly, it does give anyone the ability to form an account and start investing.
Keep in mind that T-bills are auctioned rather than sold. That means they’re only available for purchase at certain times of the month every four weeks.
Brokerage
Another way to buy T-bills is through your favorite online brokerage account such as Fidelity or Vanguard. These platforms will be more user-friendly than Treasury Direct and convenient if you’ve already got an account.
However, be aware that brokerages may limit the number of maturity options you’ll have available. You can also expect to receive a slightly discounted return because of fees.
ETFs
There are several exchange-traded funds that specialize in T-bills. This is an easy way to buy T-bills with various maturities in investment increments as small as $10 (depending on which trading app you prefer). Plus, because it’s an ETF, you can sell your shares anytime you wish.
Similar to the brokerage option, yields will be less because of fees. ETFs will also be more susceptible to losing value due to price fluctuations in the market.
Should You Invest In T-Bills?
Treasury bills can be a great deal for someone who wants to take advantage of a high-interest rate environment and earn an excellent yield. They’re easy to buy and mature relatively quickly. However, they can pose some liquidity challenges unless you strategically stagger the maturity terms.
A great way to see if you’ve got room in your budget for buying T-bills is to track your expenses against your income. This can be done with a helpful budgeting app like Buxfer. Even if you’ve only got a spare $100 per month, you could gradually start investing in them and earn a historic interest rate along the way. That’s not a bad way to put those extra dollars in your budget to good use.
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