how to buy treasury bills
the u s department of the treasury issues t bills to raise cash to fund the federal government s spending when there is a budget deficit t bills are generally held either until the maturity date or cashed before maturity investors can buy t bills in electronic form from a brokerage firm which could cost a small fee or directly from treasurydirect the platform of the u s treasury here are the steps to do so after submitting your order you should receive an on screen confirmation indicating your request has been processed you ll receive an email from treasurydirect confirming your purchase and providing a transaction summary your payment will typically be settled the next day at maturity the yield from your treasury bond will be automatically deposited into your linked account t bill prices tend to rise when the u s federal reserve is engaged in an expansionary monetary policy by purchasing treasurys conversely t bill prices fall when the fed sells its debt securities treasury bill ratesthe maturity period for treasury bills is four eight 13 17 26 and 52 weeks alternatively one through four six and 12 months 2 when interest rates are expected to rise longer maturity dates pay more than shorter dates meanwhile if interest rates are expected to fall longer maturity dates might have lower interest rates 3 below is a chart of the four week six month and one year t bill yields for the last 10 years redemptions and interestt bills are issued at a discount from the par value a 1 000 bill might cost the investor 950 when the bill matures the investor is paid the face value par value of the bill they bought since the face value exceeds the purchase price the difference is the interest earned for the investor 4for example the treasury issues a 52 week t bill in april and sells it on may 1 if it s sold for 95 419667 per 100 and an investor purchases a 1 000 52 week t bill that day they pay 954 19667 and receive 1 000 on maturity the gain is 45 80 in interest when the t bill matures 5t bills do not pay regular interest payments as with a coupon bond but a t bill does include interest reflected in the amount it pays when it matures 6 the interest income from t bills is exempt from state and local income taxes however the interest income is subject to federal income tax 7t bills are issued at a discount from the par value meaning the purchase price is less than the face value of the bill pros and cons of t billszero default risk since t bills have a u s government guaranteet bills offer a low minimum investment requirement of 100interest income is exempt from state and local income taxes but subject to federal income taxesinvestors can buy and sell t bills with ease in the secondary bond markett bills offer low returns compared with other debt instrumentsthe t bill pays no interest payments leading up to its maturityt bills can inhibit cash flow for investors who require steady incomet bills have interest rate risk so their rate could become less attractive in a rising rate environmentt bills pay a fixed rate of interest which can provide a stable income however should interest rates rise the existing t bills fall out of favor since their return is less than the market for this reason t bills have interest rate risk which means there is a danger that bondholders might lose out should there be higher rates in the future although t bills have zero default risk their returns are typically lower than corporate bonds and some certificates of deposit since treasury bills don t pay periodic interest payments they re sold at a discounted price to the face value of the bond 7if sold early there could be a gain or loss depending on where bond prices are trading at the time of the sale the sale price of the t bill could be lower than the original purchase price 2a competitive bid sets a price at a discount from the t bill s par value investors can specify the yield noncompetitive bid auctions allow investors to submit a bid to purchase a set dollar amount of bills the yield investors receive is based on the average auction price from all bidders federal reserve policylike other debt securities t bill prices fluctuate many factors can influence prices including macroeconomic conditions monetary policy and supply and demand for treasurys 4federal reserve monetary policy and the federal funds rate affect t bills the rate is the interest rate that banks charge each other for lending money from their reserve balances overnight the fed increases or decreases this rate to contract or expand the money supply 8