A U.S. Treasury Bill (also known as a 'T-Bill') is a short-term debt obligation issued by the U.S. Department of the Treasury. Think of it as a loan you make to the U.S. government that it promises to repay in a year or less. What makes T-Bills unique is how they pay you interest. Instead of sending you regular interest checks, they are sold at a discount to their face value (or par value). For example, you might buy a $1,000 T-bill for $985. When it matures, the government pays you the full $1,000. That $15 difference is your return. Because they are backed by the 'full faith and credit' of the U.S. government, which has the power to tax and print money, T-Bills are considered one of the safest investments on the planet. For this reason, their yield is often used as the benchmark for the 'risk-free rate' of return in finance. They are a cornerstone of the global financial system and a fundamental tool for conservative investors.
The beauty of a T-Bill lies in its simplicity. It's a straightforward promise that is easy to understand and even easier to own.
A T-Bill is a classic example of a 'zero-coupon bond'. This fancy term simply means it doesn't pay periodic interest (coupons). All of your profit comes at the very end, in one lump sum. Let’s walk through a simple example:
T-Bills are defined by their short lifespans. They are issued with the following standard maturities:
This short-term nature distinguishes them from their longer-term cousins: U.S. Treasury Notes (T-Notes), which have maturities from two to ten years, and U.S. Treasury Bonds (T-Bonds), which mature in 20 or 30 years.
For followers of value investing, T-Bills aren't just a boring government security; they are a strategic tool. As Warren Buffett says, “The first rule of an investment is don't lose money. And the second rule of an investment is don't forget the first rule.”
The primary appeal of a T-Bill is its unparalleled safety. The risk of the U.S. government failing to pay you back is practically zero, which eliminates default risk. In a world of volatile stock markets and unpredictable economic events, T-Bills offer a near-certain return of your capital. This certainty is the bedrock of a conservative investment strategy.
A patient value investor often has to wait for the right opportunity—a great company selling at a bargain price. These moments can be rare. So, what do you do with your cash while you wait? Leaving it in a low-yield savings account means inflation eats away at your purchasing power, a phenomenon known as 'cash drag'. T-Bills solve this problem. They provide a safe, liquid place to “park” your cash, earning a better return than a typical bank account while you scan the market for your next great investment. This keeps your capital productive and ready to be deployed instantly when Mr. Market offers you a fat pitch.
The yield on a short-term T-Bill is the “risk-free rate” that anchors the entire world of investment valuation. When you analyze a stock using a Discounted Cash Flow (DCF) model, you must estimate a discount rate to determine the present value of future earnings. This discount rate always starts with the risk-free rate. Any other investment (stocks, corporate bonds, real estate) must offer a higher expected return to compensate you for the additional risk you're taking on. Understanding the T-bill yield gives you the fundamental starting point for valuing everything else.
Buying T-Bills is more accessible than ever for ordinary investors.
T-Bills have a very attractive tax feature. The interest income you earn is:
This tax exemption can be a significant advantage for investors living in states with high income taxes, such as California or New York, making the effective return even more appealing.