Treasury Bills: How Buying, Pricing and Maturity Work
Treasury bills are short-term U.S. government securities sold at a discount or at face value; the holder receives face value at maturity, and the difference from the purchase price is the bill's interest.
Timeline
- Auction order: Choose a term and submit a noncompetitive bid through TreasuryDirect or an eligible intermediary, or use a broker for competitive bidding.
- Issue date: The auction price is debited and the electronic bill begins its term.
- Maturity: Treasury pays face value, unless proceeds were scheduled for reinvestment; a sale before maturity requires a bank, broker or dealer.
A Treasury bill is a marketable U.S. government security that matures in one year or less. TreasuryDirect lists regular terms from 4 through 52 weeks. Bills do not make semiannual coupon payments like Treasury notes and bonds. Instead, a bill is sold at a discount or at face value, and Treasury pays its face value at maturity. The difference between the purchase price and face value is treated as the bill's interest. [1][2]
For a simplified illustration, a $1,000 face-value bill bought for $980 costs $980 on the issue date and pays $1,000 at maturity, producing $20 before taxes or transaction costs. Actual auction pricing uses Treasury conventions, and a quoted bank-discount rate is not the same measure as an APY on a deposit account. Compare securities using a consistent yield measure and the exact number of days rather than comparing two headline percentages directly. [2][3]
Individuals can submit a noncompetitive auction bid in TreasuryDirect or through a bank, broker or dealer. A noncompetitive bidder agrees to accept the rate determined at auction and, within the program limit, receives the requested amount. Competitive bidders specify a rate and can receive all, part or none of the request; competitive bidding requires an intermediary. In TreasuryDirect, the final price is not known when the order is scheduled because the auction sets it. [1][4]
Treasury bills are electronic and the minimum purchase is $100 in $100 increments. Auction announcements specify the term, issue date, maturity date and other conditions. Cash must be available for settlement on the issue date. A buyer should match the maturity to the date the funds will be needed and account for operational timing, because money committed to a bill is not identical to an on-demand bank balance. [1][4]
Holding to maturity avoids having to find a buyer. In TreasuryDirect, a maturing bill is normally redeemed to the designated bank account or can be scheduled for reinvestment in the same type of security. The price of the replacement is set at its new auction, so reinvestment does not lock the old yield. Calendar the maturity and check bank details and reinvestment instructions before TreasuryDirect's change deadline. [5]
A bill can be sold before maturity, but market value can be above or below the purchase price as rates and demand change. TreasuryDirect does not execute the sale: the security must be transferred to a bank, broker or dealer, and TreasuryDirect imposes a 45-day holding period before a transfer. That makes a 4-week bill held there effectively unavailable for an early sale. Brokerage spreads, fees and settlement rules can further affect proceeds. [1][6]
Interest on Treasury bills is subject to federal income tax but exempt from state and local income taxes under current federal treatment. Treasury securities are obligations of the U.S. government, not FDIC-insured bank deposits, and a market sale can still create a gain or loss. Confirm current auction data and tax reporting with official documents, and consider liquidity, tax circumstances and account security before treating a bill as an emergency-cash substitute. [1][2][6]
Sources
- TreasuryDirect — Treasury Bills
- TreasuryDirect — Understanding Pricing and Interest Rates
- TreasuryDirect — Treasury Bills In Depth
- TreasuryDirect — Buying a Treasury Marketable Security
- TreasuryDirect — Redeem or Reinvest Treasury Bills
- TreasuryDirect — Selling a Treasury Marketable Security