How to Buy Treasury Bills

While the Federal Reserve was raising rates, yields in the Treasury market rose notably. Now that the Fed has begun to cut rates, those higher yields are a thing of the past. In particular, short-term investments, such as Treasury bills, have seen yields dip, and with more rate cuts possible in the future, these yields should drop further.

Treasury bills, also known as T-bills, have maturity dates of one year or less and are “one of the safest products there is,” said Ken Tumin, founder of DepositAccounts. They are a short-term debt obligation backed by the U.S. Treasury Department, which is what makes them such a safe bet.

Lately, Treasury bill yields have been hovering above 4%, making them an attractive option even compared to, say, the best 1-year CDs. Buying T-bills can sound complicated in theory, but it's worth understanding how they work and how to get them to reap the secure rewards.

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How T-bills work

T-bills work differently than longer-term fixed-income investments, which pay interest semiannually until maturity. You buy T-bills at a discount from the face value — known as the price before par. Your interest is the difference between the discounted price and the par value at maturity. For example, if you paid $960 for a $1,000 T-bill that matures in one year, you would earn $40 in interest, for a yield of 4%.

You can only buy T-bills in electronic form, either from a brokerage firm or directly from the government at TreasuryDirect.gov. (You can also buy Series I savings bonds through TreasuryDirect.gov).

Versus Treasury bonds, Treasury bills have shorter maturity dates. The most common maturity dates are four weeks, eight weeks, 13 weeks, 26 weeks and 52 weeks. For newly issued T-bills, the minimum purchase is $100 and the securities are sold in increments of $100.

How to buy Treasury bills

New issues are sold at auction, and to participate, you must sign up with your broker or at TreasuryDirect.gov. Auctions happen every four weeks for 52-week T-bills and weekly for shorter-term T-bills. (See below for more info on buying T-bills in the secondary market.)

To buy Treasury bills on TreasuryDirect, you need to log into your account (or open an account). Then, go to "BuyDirect." Select "Bills - Short-term securities of 1 year or less." From there, you'll see a long list of options. Start by deciding the term you want (i.e. how many weeks you will hold the bill), and from there, choose which you want to buy. The "auction date" is when the purchase will be happening. So, for example, if you think the Fed will drop rates in September, you might want to avoid picking a bill with an auction date in October, and instead find an earlier one.

After you select the bill, you write in how much you want to purchase and choose your fund source, such as a linked savings or checking account. Next, there's an option to "schedule reinvestment," which means once a bill hits maturity, your money will go back into another, similar Treasury bill. Finally, you select the "destination for the last maturity payment," which is where the money will go once the bill matures.

Click "submit" and then... just wait! When the day of the auction comes up, your request to buy a bill will automatically go through. You'll see the money leave your funding source, and if you go into your TreasuryDirect account, you can learn about your bill, including what the interest rate is.

The amount that leaves your funding source is what you paid for the bill — using our earlier example, if you bought a $1,000 1-year T-bill with a 4% interest rate, you'll see $960 left in your funding account. When the bill matures, if you didn't choose to schedule a reinvestment, you'll see $1,000 deposited into whatever destination you chose for the last maturity payment, indicating you earned $40 in interest.

The interest rate on four-week bills, as of December 16, 2024, is 4.24%. That rate is 1.02% below last year's rate of 5.26% as of Aug. 25, 2023. Although interest earned on T-bills is taxed at the federal level, it’s exempt from state and local taxes.

Buying Treasury bills on secondary markets

If you’re unimpressed with T-bill yields in the primary market, you may be able to get slightly better yields by buying them in the secondary market through your brokerage firm. You’ll have to deal with the bid-ask spread, which is the difference between the highest price a buyer is willing to pay (the bid) and the lowest a seller is willing to accept (the ask). And your broker may require a higher minimum investment than the $100 required for bills purchased through TreasuryDirect.gov.

Brokers may charge you a sales commission, too. Some brokerage firms provide additional services that could help you maximize your T-bill earnings, Tumin of DepositAccounts said. For example, you can stagger your T-bill purchases so that they each mature in three months, creating a ladder similar to what many savers use when they invest in certificates of deposit. You can also arrange to have your T-bill proceeds automatically roll over into a new T-bill upon maturity.

Are Treasury bills worth it?

Although yields on T-bills are much higher than they were in recent years, you may still be able to find better yields elsewhere, without taking on a lot more risk. Some of the top yielding 1-year CDs, for example, are paying interest of 4.5% or more. Even with the state and local tax exemption available for T-bills, CDs may be a good option, depending on your situation.

Parking your cash in a money market fund that tracks the performance of Treasury yields may provide competitive returns as well. For example, Vanguard Federal Money Market Fund (symbol VMFXX) recently had a seven-day SEC yield of 4.54%; the one-year return, as of November 30, 2024, was 5.3%.

Finally, if you think you may need your funds at a moment’s notice, a high-yielding online savings account may be a better place to park your money.

The relationship between the federal funds rate and T-bill yields

T-bill prices in the secondary market fluctuate in price similar to other debt securities. However, Federal Reserve monetary policy and the federal funds rate affect T-bills. For instance, by buying or selling T-bills, the Fed can influence short-term interest rates to achieve its monetary policy objectives.

When the federal funds rate increases, the yield on existing T-bills goes up and there is an incentive for holders to sell their T-bills. When the Fed funds rate goes down, the yield on T-bills decreases and demand generally increases.

Here are are three ways the Fed can impact T-bills:

• Interest rates: The Fed directly impacts T-bill yields by setting the federal funds rate. Higher rates mean higher T-bill yields and vice versa
• Quantitative easing: Purchases of T-bills by the Fed can lower yields by increasing demand for these securities
• Forward guidance: Statements about future rates affect market expectations and can impact T-bill yields

Typically, Treasury notes and bonds, which have longer maturities, pay higher yields than ultra-short T-bills. But the Federal Reserve’s interest rate hikes were so aggressive that two-year notes sported higher yields than 10-year bonds, meaning that the yield curve (the graph that shows the difference between short-term and long-term rates) was inverted.

However, with interest rates starting to come down, the yield is no longer inverted. As of Dec. 16, 2024, the yield on a 10-year U.S. Treasury bond was 4.387% and the yield on a U.S. 2 Year Treasury Note was 4.246%.

How does inflation affect Treasury bills?

Fewer investors tend to buy T-bills when the inflation rate is higher than the T-bill's returns.

For example, if the inflation rate stands at 4% and the T-bill discount rate is 2%, it is counterproductive to invest in T-bills since the real rate of return will be a loss. The effect of this is that there is less demand for T-bills, and their prices will drop.

Bottom line on buying Treasury bills

Treasury bills are short-term debt securities auctioned by the U. S. Treasury and considered an investing "safe haven" due to their security and guaranteed returns. The predictable returns with fixed maturity dates and interest rates ensures reliable income for investors. They can be easily purchased directly through TreasuryDirect, the U.S. Department of Treasury online platform.

T-bills may or may not make sense in your portfolio. This depends on whether a short-term maturity period of one year or less is worth the risk of getting lower returns when it is time to reinvest and if you want to have the responsibility of reinvesting the proceeds of your T-bills annually. Otherwise these securities can be used to easily adjust to market fluctuations, enabling you to take advantage of new opportunities and hopefully higher rates of return.

Note: A version of this item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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