What is Treasury bills?

A Treasury bill, often called a T-bill, is a short-term loan that an investor makes to the US government. The loan lasts a fixed period, known as the maturity, from a few weeks up to one year. Instead of paying regular interest, the government sells the bill for less than its face value, which is the amount it repays at the end. The gap between the price paid and the face value is the investor's return. Because the US government stands behind them, T-bills are widely treated as the closest thing to a risk-free investment, and their rate is the usual benchmark for cash.

Say you buy a one-year T-bill with a face value of $10,000 for $9,600. After twelve months the government pays you $10,000. Your gain is $10,000 minus $9,600, which is $400. To express that as a yield, meaning the return as a percentage of what you paid, divide $400 by $9,600, which gives about 4.2%. If the next bill you bought cost $9,800, the gain would be $200, or about 2.0% ($200 divided by $9,800). These numbers are hypothetical; actual T-bill rates move closely with the policy rate set by the central bank.

Risk-free has a narrow meaning. It means the investor receives the promised dollars, not that those dollars buy as much as before. Inflation, the general rise in prices, eats into the return: if prices rise 5% in a year and a bill pays 4%, the real return, meaning the return after inflation, is roughly −1%. There is also reinvestment risk, because when a bill matures the next one may pay much less. What T-bills largely avoid is price risk. Duration, a measure of how sensitive a bond's price is to changes in interest rates, is very short for a bill, so its value barely moves when rates rise. Longer bonds behave differently: in 2022, when US inflation reached about 9%, long-term Treasuries lost about 30%.

For a private investor, T-bills play several roles. They are a common home for money needed within a year or two, such as an emergency reserve. They act as a yardstick: the Sharpe ratio, named after William F. Sharpe, compares a portfolio's return with the T-bill rate to show how much extra was earned for the risk taken. And they mark one end of the long-term trade-off. The S&P 500 returned 10.2% a year over the 30 years to June 2026, with dividends reinvested, but it also fell −54.6% from peak to low in 2007–2009. T-bills offer stability in exchange for that higher long-run growth.

By Dr. Harry Hamann

Are Treasury bills really risk-free?
They carry very little default risk, because the US government repays them. They are not free of inflation risk, since rising prices can leave the real return below zero, or of reinvestment risk, since the next bill may pay a lower rate.

How do Treasury bills pay interest?
They pay no regular interest. A bill is bought at a discount to its face value, and the full face value is repaid at maturity. The difference between the two amounts is the investor's return.

What is the difference between Treasury bills, notes and bonds?
The maturity. Bills last one year or less and are sold at a discount. Notes last from two to ten years and bonds from twenty to thirty years; both pay interest every six months and their prices move more when rates change.

How are Treasury bills taxed in the US?
The return on a T-bill is subject to US federal income tax but is exempt from state and local income taxes. Tax treatment for investors outside the US depends on local rules.