U.S. Treasury Bills (T-Bills)

U.S. Treasury Bills (also known as T-Bills) are short-term debt securities issued by the U.S. Department of the Treasury. Think of them as IOUs from the U.S. government. When you buy a T-Bill, you are essentially lending money to Uncle Sam for a very short period—typically ranging from a few days to a maximum of 52 weeks. Unlike most other bonds, T-Bills don't pay regular interest. Instead, they are sold at a discount to their face value (the amount you get back at the end). The difference between what you pay and the face value you receive when the T-Bill “matures” is your profit. Because they are backed by the “full faith and credit” of the U.S. government, they are considered one of the safest investments on the planet. This unparalleled safety makes their yield a global benchmark, often referred to as the risk-free rate.

The beauty of T-Bills lies in their simplicity. There are no complicated interest calculations to track, just a straightforward transaction that’s easy to understand.

T-Bills are a type of zero-coupon security. This is a fancy way of saying they don't send you a check for interest every six months. All the return is baked into the price you pay upfront. Let’s make this crystal clear with an example. Imagine you want to buy a T-Bill with a face value of $1,000 that matures in 52 weeks. You might purchase it through an auction for $980. You've now lent the government $980. You then hold onto it for a year. When it matures, the Treasury Department pays you the full face value of $1,000. Your profit is the $20 difference. It's that simple! You didn't receive any interest payments along the way, but you earned a return on your money.

You can't just walk into a store and buy T-Bills off the shelf. They are sold through regularly scheduled auctions conducted by the Treasury. As an ordinary investor, you have two main ways to buy them:

• Directly from the source: You can open an account on the U.S. Treasury's official website, TreasuryDirect, and participate in auctions yourself. You would typically place a “non-competitive” bid, which means you agree to accept whatever yield is determined by the auction.
• Through a broker: Most major brokerage firms offer the ability to purchase newly issued or previously owned T-Bills. This is often more convenient if you want to hold all your investments in one place.

While T-Bills won't make you rich overnight, they play a critical role in a sound investment strategy. A value investor, like Warren Buffett, knows that sometimes the best move is to wait patiently for a great opportunity. T-Bills are the perfect waiting room.

T-Bills are the gold standard for a “cash equivalent.” They are an excellent place to park your money when you're between investments. Let's say you just sold a stock for a nice profit. Instead of letting that cash sit in a low-interest bank account where it gets eaten away by inflation, you can put it into T-Bills. This keeps your capital safe and earns you a modest return while you hunt for the next undervalued company. Their high liquidity also means you can easily sell them in the secondary market if you need your cash back before the T-Bill matures.

No investment is completely without risk, not even one as safe as a T-Bill. The risks are small, but a smart investor understands them.

• Inflation Risk: This is the main adversary. If the return on your T-Bill is 2% for the year, but inflation runs at 3%, your money has actually lost purchasing power. You can buy less with your $1,000 at the end of the year than you could at the beginning.
• Interest Rate Risk: Because T-Bills have such short lifespans, this risk is very low, but it exists. If interest rates in the economy shoot up right after you buy a T-Bill, you're locked into a lower rate. Newer T-Bills will be more attractive, and the price of your T-Bill on the secondary market might dip slightly.
• Opportunity Cost: This is the big one for long-term investors. By choosing the safety of T-Bills, you are consciously giving up the potential for much higher returns from assets like stocks. It’s the timeless trade-off between risk and reward.

The Treasury issues a whole family of debt securities. It's helpful to know the difference:

• U.S. Treasury Bills (T-Bills): Mature in one year or less. Sold at a discount, with no regular interest payments.
• U.S. Treasury Notes (T-Notes): Mature in two to ten years. They pay interest to the investor every six months.
• U.S. Treasury Bonds (T-Bonds): The long-haul runners, maturing in over ten years (typically 20 or 30). Like T-Notes, they also pay interest every six months.