How to Buy Treasury Bills

While the Federal Reserve was raising rates, yields in the Treasury market rose notably. Now that the Fed has hit a pause point, these higher yields are still here. In particular, short-term investments, such as Treasury bills, have been offering especially high yields. 

Treasury bills, also known as T-bills, have maturity dates of one year or less and are “one of the safest products there is,” said Ken Tumin, founder of DepositAccounts. They are a short-term debt obligation backed by the U.S. Treasury Department, which is what makes them such a safe bet. 

Lately, Treasury bill yields have been hovering above 5%, making them an attractive option even compared to, say, the best high-yield savings accounts. Buying T-bills can sound complicated in theory, but it's worth understanding how they work and how to get them to reap the secure rewards. 

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How T-bills work

T-bills work differently than longer-term fixed-income investments, which pay interest semiannually until maturity. You buy T-bills at a discount from the face value — known as the price before par. Your interest is the difference between the discounted price and the par value at maturity. For example, if you paid $960 for a $1,000 T-bill that matures in one year, you would earn $40 in interest, for a yield of 4%. 

You can only buy T-bills in electronic form, either from a brokerage firm or directly from the government at TreasuryDirect.gov. (You can also buy Series I savings bonds through TreasuryDirect.gov). The most common maturity dates are four weeks, eight weeks, 13 weeks, 26 weeks and 52 weeks. For newly issued T-bills, the minimum purchase is $100 and the securities are sold in increments of $100.

How to buy Treasury bills

New issues are sold at auction, and to participate, you must sign up with your broker or at TreasuryDirect.gov. Auctions happen every four weeks for 52-week T-bills and weekly for shorter-term T-bills. (See below for more info on buying T-bills in the secondary market). Although interest earned on T-bills is taxed at the federal level, it’s exempt from state and local taxes.

Typically, Treasury notes and bonds, which have longer maturities, pay higher yields than ultra-short T-bills. But the Federal Reserve’s interest rate hikes were so aggressive that two-year notes have sported higher yields than 10-year bonds, meaning that the yield curve (the graph that shows the difference between short-term and long-term rates) is inverted.

The interest rate on four-week bills, as of June 19, 2024, is 5.2%. 

Buying Treasury bills on secondary markets

If you’re unimpressed with T-bill yields in the primary market, you may be able to get slightly better yields by buying them in the secondary market through your brokerage firm. You’ll have to deal with the bid-ask spread, which is the difference between the highest price a buyer is willing to pay (the bid) and the lowest a seller is willing to accept (the ask). And your broker may require a higher minimum investment than the $100 required for bills purchased through TreasuryDirect.gov. 

Brokers may charge you a sales commission, too. Some brokerage firms provide additional services that could help you maximize your T-bill earnings, Tumin of DepositAccounts said. For example, you can stagger your T-bill purchases so that they each mature in three months, creating a ladder similar to what many savers use when they invest in certificates of deposit. You can also arrange to have your T-bill proceeds automatically roll over into a new T-bill upon maturity. 

Although yields on T-bills are much higher than they were in recent years, you may still be able to find better yields elsewhere, without taking on a lot more risk. Some of the top yielding 1-year CDs, for example, are paying interest of 5% or more. Even with the state and local tax exemption available for T-bills, CDs may be a good option, depending on your situation. 

Parking your cash in a money market fund that tracks the performance of Treasury yields, such as Vanguard Federal Money Market Fund (symbol VMFXX), which recently yielded 5.29%, may provide competitive returns as well. 

Finally, if you think you may need your funds at a moment’s notice, a high-yielding online savings account may be a better place to park your money. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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