Treasury Bills Are Paying Above 5%. Here’s Why It Matters - NerdWallet (2024)

FAQs

Why am I losing money on Treasury bills? ›

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.

Drawbacks of Investing in Treasury Bills

If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it. Another potential issue for investors has to do with how T-bills are purchased. You have to bid on them through an auction process. Bidding can be competitive or non-competitive.

With a ladder, you are always able to reinvest maturing principal at current yields. Capitalize on Rising Rates - In a rising rate environment, a ladder allows you to consistently roll into higher yielding T-bills. Your overall portfolio yield will increase with each new investment.

A Treasury bill, or T-bill, is a short-term debt obligation backed by the U.S. Treasury Department. It's one of the safest places you can save your cash, as it's backed by the full faith and credit of the government. T-bills are auctioned off at a discount and then redeemed at maturity for the full amount.

During a recession, investing in cash and cash equivalents becomes a strategic choice for investors who are hoping to preserve their capital and maintain liquidity. Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit.

Are Treasury bills taxed as capital gains? Normally no. However, if you buy a T-bill in the secondary market and then achieve a profit, you may be liable for capital gains depending on your exact purchase price.

If you're saving for a goal less than a year away: If you're saving money for a goal with a short-time horizon, T-bills can make more sense than CDs. They provide a higher APY than savings accounts, and they're more liquid than CDs.

Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.

When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

Treasury bonds—also called T-bonds—are long-term debt obligations that mature in terms of 20 or 30 years. They're essentially the opposite of T-bills as they're the longest-term and typically the highest-yielding among T-bills, T-bonds, and Treasury notes.

Why would anyone buy Treasury bills? ›

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

When your bill matures, the proceeds will be reinvested or used to purchase the next available security of the same type and term as the original purchase.

To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.

You can sell a T-Bill before its maturity date without penalty, although you will be charged a commission. (With CDs, you pay a sizeable penalty for early withdrawals.)

When investors are more wary about the health of the economy and its outlook, they are more interested in buying Treasurys, thus pushing up the prices and causing the yields to decline. There are a number of economic factors that impact Treasury yields, such as interest rates, inflation, and economic growth.

If a bond is held past its maturity, the federal government remains responsible for the debt. However, savings bonds that are held past their maturity date do not continue to earn interest and may actually lose value due to inflation.

Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time. Also, most Treasury securities are liquid, which means they can easily be sold for cash.

Investors large and small are gravitating to Treasury bills, thanks to yields of 5.4%, tax benefits, and sleep-at-night security—and there's no reason for them to stop. For a while now, Treasuries with maturities of a year or less, known as T-bills, have offered more yield than other U.S. debt offerings.