Treasury Bills: Short-Term Investing for Capital Preservation

When you need a safe place to park cash for a few weeks, months, or up to a year — capital that must be preserved and accessible — U.S. Treasury bills (T-bills) are one of the most compelling options available. They are backed by the full faith and credit of the U.S. government, have no credit risk, offer competitive yields in most interest rate environments, and benefit from the same state and local tax exemption that applies to all Treasury securities.

T-bills have become especially relevant in the post-2022 rate environment, when their yields climbed from near zero to above 5% — competitive with or exceeding most savings accounts while carrying the government's guarantee. This guide explains how T-bills work, how to purchase them, and when they make sense as a component of your savings strategy.

Table of Contents

1. What Are Treasury Bills?
2. How T-Bills Work: Discount Pricing
3. Available Maturities
4. How to Buy Treasury Bills
5. T-Bill Rates and What They Mean
6. T-Bills vs. High-Yield Savings Accounts
7. Tax Treatment
8. When T-Bills Make Sense

What Are Treasury Bills?

Treasury bills are short-term debt obligations issued by the U.S. Department of the Treasury with maturities ranging from four weeks to one year. They are the shortest-maturity instruments in the Treasury family (longer maturities are Treasury notes at 2–10 years and Treasury bonds at 20–30 years).

T-bills are considered the closest thing to a risk-free investment that exists. They are backed by the U.S. federal government — which has never defaulted on its debt obligations — and are so liquid that they serve as the foundation of money market rates globally. When financial professionals talk about the "risk-free rate," they are typically referring to the 3-month T-bill yield.

Unlike longer-term Treasuries that pay regular coupon interest, T-bills are discount securities — they are issued at below face value and mature at face value, with the difference representing the investor's return. There are no periodic interest payments; the entire return comes at maturity in a single lump sum equal to the face value minus the purchase price.

How T-Bills Work: Discount Pricing

The mechanics of T-bill pricing differ from most investments you are familiar with. Understanding the discount structure is essential to interpreting yields correctly.

When the Treasury auctions a 26-week (6-month) T-bill with a face value of $10,000 at a 4.9% annualized discount rate, you do not pay $10,000. Instead, you pay something less — in this case approximately $9,755 — and you receive $10,000 when the bill matures six months later. Your profit of $245 represents your interest income for the period.

T-bill yields are quoted in several ways, creating potential confusion:

Discount Rate: The annualized rate based on face value — used in the auction process. This understates the actual return because it is calculated on the $10,000 face value, not the $9,755 you actually invested.

Investment Rate (or Coupon Equivalent Yield): The annualized return based on the actual purchase price — a more accurate representation of what you earn on the money you invested. For the same 26-week bill above, the investment rate would be approximately 5.05% because your $245 gain is calculated on the $9,755 invested, not on $10,000.

Annual Percentage Yield (APY): For comparison with savings accounts and money market funds, T-bill yields are sometimes expressed as an APY that accounts for compounding if the proceeds are reinvested at the same rate at maturity. The APY is typically slightly higher than the investment rate for shorter maturities.

When comparing T-bill yields to savings account APYs, always compare the T-bill's investment rate to the savings account APY — these are the most comparable measures of what you actually earn on your money.

Available Maturities

The Treasury regularly auctions T-bills in six standard maturities:

• 4-week T-bill (1 month): Auctioned weekly. Provides the most liquidity with the shortest commitment. Yields most closely track the Federal Reserve's overnight policy rate.
• 8-week T-bill (2 months): Auctioned weekly. Slightly higher yield than 4-week bills in normal yield curve conditions.
• 13-week T-bill (3 months): Auctioned weekly. The benchmark for the "risk-free rate" in finance. Provides good balance between yield and flexibility.
• 17-week T-bill: Auctioned weekly. Introduced in 2022 to fill a gap between 13-week and 26-week maturities.
• 26-week T-bill (6 months): Auctioned weekly. Often offers the best yield-to-commitment trade-off in a normal yield curve environment.
• 52-week T-bill (1 year): Auctioned every four weeks. The longest T-bill maturity, bridging T-bills and 2-year T-notes.

Investors who want continuous short-term T-bill exposure often construct a T-bill ladder — purchasing bills at multiple maturities so that a portion comes due every few weeks. As each bill matures, the proceeds are reinvested into a new bill at the current rate, providing both liquidity and yield optimization.

How to Buy Treasury Bills

TreasuryDirect.gov (Direct from the Government)

The most straightforward approach is purchasing directly through TreasuryDirect.gov — the U.S. government's own platform. You create a free account, link your bank account, and participate in Treasury auctions as a noncompetitive bidder. Noncompetitive bidding guarantees you receive the full amount you requested at the auction's clearing yield, without any risk of being excluded from the auction.

TreasuryDirect auctions are announced in advance on the Treasury website, with the auction date, settlement date, and maturity date all specified. You submit your noncompetitive bid for the dollar amount you want (minimum $100, in multiples of $100, up to $10 million per auction per bid). The Treasury automatically debits your bank account on the settlement date and credits your TreasuryDirect account with the bills. At maturity, face value is automatically deposited to your linked bank account unless you set up automatic reinvestment.

Automatic reinvestment is a useful TreasuryDirect feature: you can instruct the system to automatically reinvest maturing bills into the same maturity at each subsequent auction, essentially running a T-bill ladder on autopilot.

Through a Brokerage (Secondary Market and New Issues)

Most major brokerages — Fidelity, Charles Schwab, Vanguard, TD Ameritrade — allow you to purchase T-bills both at new issue (through the Treasury auction process via your brokerage) and in the secondary market at current market prices.

Purchasing new-issue T-bills through your brokerage is functionally similar to TreasuryDirect — you submit a noncompetitive bid through the brokerage's treasury auction interface, and the bills are held in your brokerage account rather than in a separate TreasuryDirect account. This approach has the significant advantage of consolidating your T-bills with your other investments in a single account.

Secondary market T-bills can be purchased immediately at prevailing market prices — no waiting for the next auction. This provides more flexibility if you need to deploy capital on a specific date or want a T-bill maturing on an exact date not covered by the next available auction.

Most brokerages charge no commissions on Treasury purchases. Fidelity and Schwab both offer new-issue T-bill purchases through their platforms at no additional cost.

Treasury ETFs and Money Market Funds

Investors who want short-term T-bill exposure without managing individual bill purchases can use Treasury money market funds or ultra-short Treasury ETFs. Treasury money market funds (such as Fidelity Government Money Market Fund or Vanguard Treasury Money Market Fund) hold exclusively short-term government obligations and maintain a stable $1.00 NAV, providing daily liquidity at competitive yields closely tracking T-bill rates.

Ultra-short Treasury ETFs like the iShares 0-3 Month Treasury Bond ETF (SGOV) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) provide T-bill equivalent yields with same-day stock market liquidity and automatic reinvestment. These funds charge modest expense ratios (SGOV charges 0.09%, BIL charges 0.14%) and are appropriate for investors who want T-bill exposure with maximum liquidity.

T-Bill Rates and What They Mean

T-bill yields move closely with the Federal Reserve's target for the federal funds rate — the overnight lending rate between banks. When the Fed raises rates, T-bill yields rise; when the Fed cuts rates, T-bill yields fall. This close relationship makes T-bills particularly attractive during periods of Federal Reserve rate increases and less compelling when rates are falling or at historic lows.

The Federal Reserve's policy decisions are therefore a key input into whether T-bills are competitive with other savings vehicles at any given time:

• High-rate environment (Fed funds rate 4–6%): 6-month T-bills typically yield 4.5–5.5%, making them highly competitive with savings accounts and arguably superior given the government guarantee and state tax exemption.
• Moderate-rate environment (Fed funds rate 2–3%): 3-month T-bills yield 1.5–2.5%. Still safe, but HYSA rates may be more competitive if banks are slow to reduce deposit rates.
• Low-rate environment (Fed funds rate near 0%): T-bill yields fall to near zero — as they were from 2008–2015 and 2020–2022. In this environment, even modest HYSA rates can significantly outperform T-bills.

Current T-bill auction results are published at TreasuryDirect.gov and updated after each weekly auction. The Treasury also publishes a yield curve for all Treasury maturities daily, showing current market rates across the full maturity spectrum from 1 month to 30 years.

T-Bills vs. High-Yield Savings Accounts

The comparison between T-bills and high-yield savings accounts (HYSAs) is the most common question for investors deciding where to park short-term cash. Both are safe, liquid, and yield-generating — but with meaningful differences:

Advantages of T-Bills over HYSAs:

• Government guarantee: T-bills are direct obligations of the U.S. government — no counterparty risk beyond the federal government itself. HYSAs are FDIC-insured up to $250,000, which protects against bank failure but is a different (slightly stronger bureaucratic) form of guarantee.
• State and local tax exemption: T-bill interest is exempt from state and local income taxes. For residents of high-tax states like California (13.3%), New York (10.9%), or New Jersey (10.75%), this exemption can mean a meaningful effective yield advantage over fully taxable HYSA interest.
• Yield certainty: Once you purchase a T-bill, the yield is locked in for the term. HYSA rates can be changed by the bank at any time with minimal notice.
• Potential yield advantage: In many rate environments, T-bill yields compare favorably to HYSA rates because large banks are often slow to pass through Fed rate increases to depositors. Online banks and credit unions are faster to respond, but even they may lag T-bill yields.

Advantages of HYSAs over T-Bills:

• Daily liquidity: HYSA funds can be transferred out at any time with no penalty. T-bills must either be held to maturity or sold in the secondary market (at the current market price, which may be above or below purchase price depending on interest rate movements since purchase).
• No auction timing requirement: You can deposit to a HYSA immediately. T-bill purchases must be timed to auction windows (though secondary market purchases can happen on any business day).
• Simplicity: A HYSA requires no separate account, no understanding of discount pricing, and no maturity management. T-bills require more active management, particularly if you are building a ladder.
• No minimum hold period for full value: You can move HYSA funds freely. Selling T-bills before maturity at market prices can result in a slight gain or loss depending on rate movements since purchase.

Tax Treatment

T-bill interest — the difference between the purchase price and face value received at maturity — is subject to federal income tax in the year of maturity (or sale, if sold before maturity). Unlike most bond coupons which are taxed annually as received, T-bill discount income is deferred until the bill matures or is sold.

Critically, T-bill interest is completely exempt from state and local income taxes, just like all other Treasury securities. This exemption makes T-bills particularly valuable for residents of high-tax states. The after-tax advantage over a HYSA increases with state tax rate.

A calculation for a California investor comparing a T-bill yielding 5.00% to a HYSA yielding 5.10%:

• T-bill after-tax yield: 5.00% × (1 - 0.37 federal rate) = 3.15% federal tax, remaining 5.00% less 1.85% = 3.15% net... Actually, let me use taxable equivalent: if federal rate is 37%, T-bill after-tax (federal only) = 5.00% × (1 - 0.37) = 3.15%
• HYSA after-tax yield: 5.10% × (1 - 0.37 federal - 0.133 California) = 5.10% × 0.497 = 2.53%
• The T-bill at 5.00% produces a higher after-tax yield than the HYSA at 5.10% for this California investor, despite the lower nominal rate, entirely due to the state tax exemption.

For investors in states with no income tax (Florida, Texas, Nevada, Washington), the state tax advantage disappears and the comparison reduces to pure nominal yield comparison.

When T-Bills Make Sense

T-bills are appropriate for several distinct use cases:

Emergency fund — the upper tier: Your base emergency fund should be in an immediately accessible HYSA. However, funds beyond your three-month baseline (months four through six, or a larger buffer) can be held in 13-week or 26-week T-bills for higher yield, with the modest illiquidity (waiting for next maturity or selling at market) being an acceptable trade-off for genuinely excess emergency reserves.

Short-term savings goals (6–12 months away): If you are saving for a known expense — a tax bill due in April, car replacement in six months, a vacation deposit — T-bills matching the payment date lock in a competitive yield with no credit or market risk. A 26-week T-bill purchased in October for April property tax payment provides predictable returns with government backing.

High-tax-state investors with cash holdings: For investors in California, New York, New Jersey, Connecticut, Massachusetts, and similar states, the state tax exemption of T-bills provides a meaningful yield advantage over equivalently yielding savings accounts. Any investor in a 9–13% state income tax bracket should run the taxable-equivalent yield comparison before choosing a HYSA over T-bills.

Cash awaiting investment deployment: Proceeds from a home sale, inheritance, or business transaction that will eventually be invested but need a temporary safe harbor can be parked in T-bills while you deliberate on the investment plan. The competitive yield offsets the opportunity cost of sitting in cash better than a low-yield checking account.

Corporate and business cash management: Businesses holding operating reserves, payroll funds, or retained earnings benefit from T-bills' government guarantee (beyond FDIC limits), competitive yields, and state tax exemption. Many small and medium businesses use Treasury money market funds or direct T-bill ladders for cash beyond operating accounts.

Treasury bills are not glamorous — they do not compound dramatically over decades like equity investments, and they require more management than simply leaving money in a savings account. But for the specific purpose of earning a competitive, guaranteed yield on money you need to keep safe and accessible in the near term, they are one of the most reliable tools available to any investor, regardless of portfolio size.