What are Treasury Bills?

A Treasury Bill (or T-Bill) is a fixed-income debt security issued by the U.S. Department of the Treasury to fund government operations.

When you buy a T-Bill, you loan money to the U.S. government for a period of time (one year or less) – like an IOU. In return, you receive the full par value at maturity.

Since the U.S. government is issuing and backing the T-Bill, it carries a “risk-free” status; as long as the U.S. government can pay its debts, you will receive the face value of the T-Bill at maturity (an “interest payment” of sorts).

While individual risk tolerance levels vary, this “risk-free” status is so important that even banks and other institutional investors place their short-term cash in T-Bills.

How do Treasury Bills work?

Treasury bills are discount or zero coupon bonds. That means when they are sold, they are bought at a price below the maturity or face value. The return you earn is the difference between the face value and the discount price paid at purchase.

For example*:

1. $1,000 face value bill sells at auction for a bond price of $950 and a six-month maturity.  
2. Assuming you hold the T-bill for six months, you will get $50 per bill.
3. $1,000 face value - $950 buy price = $50 earned

Investors earn no return in this case. The focus is on the U.S. federal government guarantee, as this is considered amongst the safest places to “store” money for the short term.

*This example is for illustrative purposes only. Rho does not guarantee treasury yields. Be mindful of providers that promise or guarantee higher yields.

Note: Like prices in the stock market, T-bill prices can experience fluctuations. If T-bills are in high demand, they can have an auction price of full face value (i.e., auctioned at a $1,000 price equal to a $1,000 face value).

Benefits of Treasury Bills

Learn why Treasury Bills are a popular corporate cash management tool.

Investment variety

One of the great things about T-Bills is that they come in various maturity dates with a consistent auction schedule for investor purchase, offering variety for investors.

4-week, 8-week, 13-week, 26-week T-Bills auction weekly, and the 52-week bill auctions every four weeks.

You can find the upcoming issuance schedule and previous auction results on TreasuryDirect (treasurydirect.gov).‍

One other short-term security is a cash management bill (CMB), issued when the Treasury’s cash balance is low and tends to provide a higher yield than regular fixed maturity bills.

Note: U.S. government securities with longer maturities above one year are called Treasury Notes (e.g., 10-year Treasury Notes) and Treasury bonds (T-Bonds), which have the longest maturity of the three.

Safety

Treasury Bills are considered by many to be low-risk because they are backed by the U.S. government.

Liquidity

The U.S. Treasury securities market transacts over $500 billion daily, and the T-Bill secondary market is a significant part of that $500 billion, meaning if your company decides to sell a T-bill before maturity, there should always be a willing bidder. What's more, the money will be available in your organization’s brokerage account within 2-3 business days.

Income

Thanks to the set maturity dates and the discount purchase price of T-Bills, you always know how much and when you will get paid, which allows your team to create a consistent and definitive income stream. A simple way to build an income stream with T-Bills is with a bond ladder. We discussed bond ladders in a previous blog post, which you can read here.

Federal Reserve Rate Tracking

U.S. Treasury Bill yields (APY) are influenced both by the Federal Reserve via monetary policy and financial markets. This means that as the central bank adjusts the discount rate, say, to bring the inflation rate down, the yield of Treasury Bills will generally shift as a result of their decision.

Treasury Bills offer the advantage of aligning with the Fed's rate changes, which may decrease owners' need to constantly "rate shop" in search of higher interest rates.  However, it's important to note that with an increase in these rates, the yield on outstanding T-Bills may rise, but the overall value of pre-existing T-Bills could decline. For example, T-Bills purchased at a 3% rate could drop in value if rates rise to 4%.

This highlights the importance of active portfolio management, even when investing in low-risk instruments like T-Bills, to optimize returns and navigate potential risks.

With Rho Prime Treasury, we handle this heavy lifting for you.

Taxes

• The return earned on T-Bills is exempt from state and local income taxes but not federal taxes.

Note: Consult with your local tax professional, as every entity is different. No content should be construed as legal or tax advice.

How to buy treasury bills

There are a few options to purchase Treasury Bills:

1. Auction process: T-Bills sell via auction on a set schedule. You can purchase bills with a non-competitive or competitive bid directly from the U.S. Treasury at each auction.

2. Non-competitive bid: Most investors prefer to buy T-Bills with a non-competitive bid. The benefit of a non-competitive bid is that you have a guarantee to buy T-Bills at the final auction price.

3. Competitive bid: With a competitive bid, you state the minimum rate of return your business is willing to earn for the new issue T-Bill. You get bills if the auction closes at or above that minimum rate. The downside to a competitive bid is running the risk of buying nothing. This is because you wanted such a high return rate, but buyers with lower expectations might have bought before you.

4. Secondary market: The size of the T-Bill market is in the billions! And it grows each year as the U.S. government issues new bonds to run the country. This means there is an active and liquid secondary market for previously issued T-Bills. Your finance team can buy and sell T-Bills through your company’s bank or brokerage firm.

If you want to geek out on U.S. Treasury Securities statistics – check out this SIFMA page.

Note: T-Bills can be a strong tool in your cash management strategy. However, effective cash management requires more than a set-it-and-forget-it approach. With Rho Prime Treasury, we handle this heavy lifting for you.

How to use treasury bills?

Let’s examine how your business can leverage T-Bills with a treasury management investment portfolio.

Need: Your company has $1,000,000 total to invest, with a focus on safety, but some return is also important.

Solution: Put $250,000 max in an FDIC-insured account and $750,000 in a T-Bill ladder.

Remember, bank accounts only have $250k of FDIC protection. Any dollar above $250k in a bank account is at risk. That means your organization would need four bank accounts at four different financial institutions to have FDIC protection on a $1,000,000 cash balance.

T-Bills fix the FDIC limit problem because of the U.S. government guarantee. Your business could keep $250k in a bank account for expenses and FDIC protection and then put the remaining $750k into a T-Bill ladder, being mindful of maturity dates to prevent cash flow issues.

The $750k for the Treasury Bill ladder is spread over different maturities up to 52 weeks. Each time a T-Bill matures, your entity would get paid the par or face value and then rebuy new T-Bills with a maturity date in the future.

If your corporate expenses spiked above the $250k in the bank account, you could sell a T-Bill in the liquid market, and cash would be in your account in one day.

While this example is basic, it highlights the safety (U.S. government backing), liquidity (secondary market), and defined return (discount to face) T-Bills give investors.

Are treasury bills FDIC insured?

No, Treasury Bills (T-Bills) are not insured by the Federal Deposit Insurance Corporation (FDIC). However, they are backed by the full faith and credit of the U.S. Government, making them considered one of the safest investments.

FDIC insurance applies to deposit accounts at FDIC-insured banks but not to investments such as stocks, bonds, mutual funds, life insurance policies, annuities, or fixed-income securities, including T-Bills.

Wrap-up: Simplify corporate cash management with Rho

There is no perfect investment. However, investors and financial advisors focused on maximum safety over returns have an option in U.S. T-Bills.

U.S. T-Bills are largely considered a low-risk investment thanks to the government-backed guarantee. They can be liquid with cash returning to your business in one day. And you earn the bond's full face / par value at maturity.

‍Rho offers Prime Treasury, an automated corporate treasury management service that grants scaling businesses the professional level of cash management technology and services that the world’s largest companies receive. Use our Prime Treasury as an extension of your team to optimize and protect your idle cash reserves so you can focus on your business.

With our integrated Rho technology and investment options, including U.S. Treasuries and Investment Grade corporate bonds, Rho can help you define your investment strategy with custom portfolios and bond ladders, as well as reinvest capital when assets mature.

Schedule time with one of our specialists to learn what our bespoke treasury management can do for your business.

Interested in learning about money market funds, the yield curve, ETFs, T-Bill ladders, and other important financial topics? Visit the Rho blog today.

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.