Treasury bills work by selling at a discount and paying you back the full face value when they mature, with the gap between the two amounts serving as your return. There are no coupon payments along the way. You buy a bill for less than it’s worth on paper, wait out a term of anywhere from four weeks to a year, and collect the face amount on the maturity date. The U.S. Department of the Treasury issues these securities under 31 U.S.C. § 3104, which authorizes borrowing on the credit of the United States to cover expenditures authorized by law.1Office of the Law Revision Counsel. 31 USC 3104 – Certificates of Indebtedness and Treasury Bills The minimum purchase is $100, and everything about them is designed to be accessible to individual investors.
The Discount Mechanic
A T-bill is a zero-coupon debt instrument. That means it pays no periodic interest. Your entire return comes from buying below face value and being paid the full face value at maturity.
Say you buy a 26-week bill with a $1,000 face value for $975. Twenty-six weeks later, the Treasury pays you $1,000. Your earnings are the $25 difference. There are no separate interest checks in between, and no reinvestment of coupons to track.
Because the return is baked into the purchase price rather than paid as interest, comparing a T-bill’s yield to a savings account or CD requires care. The Treasury quotes two different yields at auction. The bank discount rate uses face value as the base and a 360-day year. The investment yield (also called the coupon equivalent or bond equivalent yield) uses your actual purchase price as the base and a 365-day year, which produces a higher percentage. The investment yield is the more useful figure when you’re weighing a T-bill against a product that quotes an annual percentage yield, because it reflects what your money actually earned relative to what you put in.
The Terms You Can Choose
The Treasury offers seven standard T-bill maturities: 4, 6, 8, 13, 17, 26, and 52 weeks.2TreasuryDirect. Treasury Bills Every term except the 52-week bill is auctioned weekly. The 52-week bill goes to auction every four weeks.3TreasuryDirect. When Auctions Happen (Schedules) The Bureau of the Fiscal Service handles the administrative side of issuing and servicing the securities.4U.S. Department of the Treasury. Bonds and Securities
How to Buy a Treasury Bill
You have two main routes: directly through the government’s TreasuryDirect platform, or through a bank or brokerage account.
To open a TreasuryDirect account, you need a Social Security Number (or Taxpayer Identification Number for entities), a U.S. address, a checking or savings account with routing and account numbers, and an email address.5U.S. Department of the Treasury. Open an Account – TreasuryDirect You must be at least 18 to open a primary account, though parents and guardians can open custodial accounts for minors.6TreasuryDirect. TreasuryDirect FAQ The minimum purchase is $100, and amounts above that must be in whole-dollar increments.2TreasuryDirect. Treasury Bills
Buying through a brokerage costs you nothing in access but gives you flexibility on the back end. Bills held at a broker can be sold on the secondary market without the transfer step required for bills held at TreasuryDirect, which matters if there’s any chance you’ll want to exit early.
How the Auction Sets Your Price
Every T-bill is sold at auction, and there are two ways to bid. As an individual, you’ll almost always use a non-competitive bid. You agree in advance to accept whatever yield the auction sets, and in exchange your bid is guaranteed to be filled, up to $10 million per auction.7eCFR. 31 CFR 356.12 – What Are the Different Types of Bids and Do They Have Specific Requirements or Restrictions That cap doesn’t apply when you’re reinvesting the proceeds of a maturing bill.
Competitive bids let you specify the exact yield you want. If the auction clears at a lower yield than you asked for, your bid goes unfilled. Any single competitive bid at one yield that exceeds 35% of the total offering gets reduced to that threshold.7eCFR. 31 CFR 356.12 – What Are the Different Types of Bids and Do They Have Specific Requirements or Restrictions You can’t bid both competitively and non-competitively in the same auction.
The schedule follows a predictable weekly pattern. For 6-week bills, for example, the Treasury announces the offering on a Thursday, holds the auction the following Tuesday, and issues the bills the Thursday after that.8TreasuryDirect. General Auction Timing Non-competitive bids must be in by noon Eastern on auction day; competitive bids are due by 1:00 p.m. Eastern. Once bids close, the Treasury sets a single clearing yield, and every successful non-competitive bidder pays the corresponding price. The purchase amount is debited from your linked bank account on the issue date.
Selling Early or Rolling Over
You don’t have to hold a bill to maturity. T-bills are marketable securities that trade on the secondary market through banks, brokers, and dealers.9TreasuryDirect. Selling a Treasury Marketable Security The price you get depends on where interest rates have moved since you bought. If rates fell, your bill is worth more than you paid. If rates rose, it’s worth less.
There’s one restriction to know about if you bought through TreasuryDirect: you must hold the bill in your account for at least 45 days before you can sell or transfer it.9TreasuryDirect. Selling a Treasury Marketable Security That rule makes a 4-week bill bought through TreasuryDirect impossible to sell early, because it matures before the hold period ends. If you might need to exit before maturity, a brokerage account avoids the problem. Selling a bill held at TreasuryDirect also requires transferring it to a broker first, which adds a step.10TreasuryDirect. Transferring From One System to Another
If you’d rather stay invested, you can schedule a reinvestment that rolls the maturing bill’s proceeds into a new bill of the same term.11TreasuryDirect. Redeem/Reinvest Treasury Bills You can set this up when you first buy the bill or anytime up to four business days before it matures, and you can edit or cancel it within that same window. The reinvestment is treated as a new non-competitive bid at the next auction. Any small difference between the maturing face value and the new discounted price gets deposited into your bank account. Staggered reinvestments across different terms are how investors build a T-bill ladder with regular access to cash.
What You Owe in Taxes
The discount you earn at maturity is treated as interest income for federal tax purposes.12Internal Revenue Service. Topic No. 403, Interest Received If you buy for $980 and receive $1,000, the $20 is taxable interest for the year the bill matures. TreasuryDirect or your broker will issue a Form 1099-INT.13TreasuryDirect. Tax Forms and Tax Withholding One quirk: if a bill matures on December 31, the interest is recorded in that tax year even if the money doesn’t land in your bank account until the next business day.
The interest is exempt from state and local income taxes under 31 U.S.C. § 3124, which shields obligations of the United States from state and local taxation.14Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation For investors in high-tax states, that exemption can meaningfully change after-tax returns compared to a CD or savings account with a similar gross yield.12Internal Revenue Service. Topic No. 403, Interest Received
Selling on the secondary market changes the tax picture slightly. Any gain up to the amount of discount that would have accrued through the sale date is taxed as ordinary interest income.15Office of the Law Revision Counsel. 26 USC 1271 – Treatment of Amounts Received on Retirement or Sale or Exchange of Debt Instruments Anything above that accrued discount is short-term capital gain, since T-bills always have maturities under one year. Suppose you bought a 26-week bill at a $50 discount and sold halfway through the term. The ratable share of the discount at that point is $25. A $30 gain would be reported as $25 interest and $5 short-term capital gain. A $20 gain would be all ordinary interest. Losses on secondary-market sales are capital losses, deductible under the ordinary capital loss rules.