Treasury Bill (T-Bill)

Quick Definition

Treasury bills, or T-bills, are short-term debt obligations issued by the U.S. Treasury with maturities ranging from 4 weeks to 52 weeks. They are sold at a discount to their $100 face value and do not pay periodic interest. Instead, you receive the full face value at maturity, and the difference between your purchase price and the face value is your return. As of August 2026, T-bills yield approximately 3.7% to 3.8% on an investment-yield basis.

What It Means

T-bills are the closest thing to a risk-free investment in the financial world. They are backed by the full faith and credit of the U.S. government, which has never defaulted on its obligations. They have maturities of one year or less, which means almost no interest rate risk. They are the most liquid debt instrument on earth, traded in a market deep enough to absorb hundreds of billions of dollars without blinking.

For individual investors, T-bills serve two purposes. First, they are a safe place to park cash that you need within a year: an emergency fund, a house down payment, tuition money. Second, they are the benchmark against which all other investments are measured. When someone says the "risk-free rate," they mean the T-bill yield. If an investment cannot beat the T-bill rate, it is not compensating you for the risk you are taking.

The T-bill market has been through a dramatic cycle. In 2020, yields were near zero, effectively 0.08% on a 3-month bill. By late 2023 and early 2024, yields exceeded 5.4% as the Federal Reserve raised rates aggressively. As of August 2026, the Fed has cut its federal funds rate to a target range of 3.5% to 3.75%, and T-bill yields have settled into the 3.6% to 3.8% range.

Current T-Bill Yields (August 2026)

Based on data from the U.S. Treasury and the Federal Reserve H.15 release, here are the approximate secondary market yields as of August 20, 2026:

The coupon equivalent, also called the investment yield or bond equivalent yield, is the more accurate measure for comparing T-bills to coupon-paying bonds. It accounts for the fact that T-bills are discount instruments and uses a 365-day year rather than the 360-day year used for bank discount quoting.

How It Works

The Discount Mechanism

T-bills do not pay coupons. You buy them at a price below face value, and the government pays you the full face value at maturity. The difference is your interest.

Here is a concrete example. You buy a 26-week (6-month) T-bill with a $1,000 face value at a bank discount rate of 3.78%. The purchase price is calculated as:

Price = Face Value x (1 - Discount Rate x Days to Maturity / 360)

For a 182-day bill: Price = $1,000 x (1 - 0.0378 x 182/360) = $1,000 x (1 - 0.01909) = $1,000 x 0.98091 = $980.91

You pay $980.91 today. In 182 days, you receive $1,000. Your profit is $19.09. Your investment yield is:

Investment Yield = ($1,000 - $980.91) / $980.91 x 365/182 = 0.01947 x 2.0055 = 3.90%

This matches the coupon equivalent yield in the table above.

How to Buy T-Bills

There are two main ways for individual investors to buy T-bills:

1. TreasuryDirect: The U.S. Treasury's direct platform at TreasuryDirect.gov. You buy directly from the government at auction with no fees. Minimum purchase is $100. This is the cheapest method but the interface is dated and selling before maturity requires transferring to a brokerage.

2. Through a brokerage: Most brokers (Fidelity, Schwab, Vanguard, etc.) offer T-bills at auction with no commission and also provide a secondary market where you can buy and sell bills before maturity. This is more flexible than TreasuryDirect because you can sell if you need cash.

The Auction Process

The Treasury holds regular auctions for T-bills:

Competitive bids are submitted by primary dealers and institutional investors. Individual investors submit non-competitive bids, meaning they accept whatever yield the auction sets. Non-competitive bidders are guaranteed to receive their full requested amount up to $10 million per auction.

Tax Treatment

T-bill interest is subject to federal income tax but exempt from state and local taxes. This is a meaningful advantage in high-tax states like California and New York. The interest is reported on Form 1099-INT and taxed as ordinary income in the year it is received (at maturity for bills held less than a year, or when sold).

For someone in a 35% federal bracket and a 9% state bracket, a 3.9% T-bill yield has an after-tax return of 3.9% x (1 - 0.35) = 2.54%, with no state tax. A comparable corporate bond yielding 5.5% would have an after-tax return of 5.5% x (1 - 0.35 - 0.09) = 3.08%. The T-bill's tax advantage narrows the gap significantly.

Real-World Examples

Example 1: Parking an Emergency Fund

Sarah has a $30,000 emergency fund. She previously kept it in a savings account earning 0.5%. In August 2026, she buys a ladder of 4-week, 8-week, and 13-week T-bills through her brokerage, each with $10,000.

Her average annualized yield is about 3.7%, compared to 0.5% in her old savings account. Over a year, that is $1,110 in interest versus $150. She also has a bill maturing every few weeks, providing liquidity if she needs cash.

Example 2: T-Bills vs. High-Yield Savings

As of August 2026, the best high-yield savings accounts pay approximately 3.5% to 4.0% APY. T-bills yield 3.7% to 3.8% on an investment-yield basis. The comparison depends on your tax situation:

In a high-tax state, T-bills win on an after-tax basis even when the nominal yield is slightly lower. In a no-tax state (Texas, Florida, Washington), the difference is negligible.

Example 3: The 2023-2024 T-Bill Boom

In October 2023, the 3-month T-bill yield reached 5.44%, and the 6-month hit 5.56%. Investors who locked in those rates earned guaranteed returns that beat the S&P 500's dividend yield and most bond funds. A $100,000 investment in a 6-month T-bill at 5.56% generated $2,780 in six months with zero market risk. Many investors who had been sitting in cash earning nothing suddenly discovered T-bills through their brokerages or TreasuryDirect.

Example 4: T-Bills in a Bond Ladder

An investor building a bond ladder can use T-bills for the short rungs. A ladder with $20,000 each in 3-month, 6-month, 1-year, 2-year, and 5-year Treasuries provides a blend of liquidity and yield. The 3-month and 6-month rungs mature frequently and can be reinvested at current rates, while the longer rungs lock in yields for years. This structure manages both interest rate risk and reinvestment risk.

Key Points to Remember

• T-bills are short-term U.S. government debt with maturities from 4 weeks to 52 weeks, sold at a discount to face value.
• They pay no coupons. Your return is the difference between the purchase price and the face value paid at maturity.
• As of August 2026, T-bill yields range from approximately 3.6% to 3.8% on a bank discount basis, with investment yields (coupon equivalents) slightly higher.
• T-bill interest is exempt from state and local taxes, a meaningful advantage in high-tax states.
• They have near-zero interest rate risk because of their short maturities, and zero credit risk because they are backed by the U.S. government.
• You can buy T-bills directly at TreasuryDirect.gov with no fees, or through a brokerage with more flexibility.
• The 3-month T-bill yield is the most common proxy for the "risk-free rate" in financial models and valuation.

Common Mistakes to Avoid

• Confusing bank discount rate with investment yield: The bank discount rate uses a 360-day year and is based on face value, not purchase price. It always understates your actual return. The coupon equivalent (investment yield) is the number you should use to compare T-bills to other investments.
• Buying T-bills through a dealer at a markup: Some banks and financial advisors sell T-bills with embedded fees or markups. Buy directly through TreasuryDirect or a no-commission brokerage to get the auction price.
• Forgetting about reinvestment risk: When your T-bill matures in 4 or 13 weeks, you must reinvest at whatever rate exists then. If rates have fallen, your next bill pays less. T-bills have low interest rate risk but high reinvestment risk.
• Ignoring the state tax advantage: In states with high income taxes, the state tax exemption on T-bill interest can add 50 to 100 basis points to your after-tax return compared to a taxable alternative with the same nominal yield.
• Not laddering maturities: Buying a single T-bill means all your cash is tied up until it matures. A ladder of staggered maturities ensures something is always maturing, giving you access to cash without having to sell.
• Assuming T-bill yields will stay high: The 5%+ yields of 2023 and 2024 were historically unusual. Yields have already fallen to the 3.7% range as the Fed cut rates. Do not extrapolate peak yields indefinitely.

Related Concepts

T-bills are the shortest-maturity bond issued by the U.S. Treasury and form the short end of the yield curve. Their yields are closely tied to the federal funds rate set by the Federal Reserve, and they carry minimal interest rate risk because of their short duration. They compete with money market funds and high-yield savings accounts for short-term cash, and they are a building block of fixed-income securities portfolios. For practical guidance, read our Treasury bills explained guide and our bond ladder retirement income strategy. You can model your returns with our investment return calculator. Current daily T-bill rates are published by the U.S. Treasury.

Frequently Asked Questions

Q: Are Treasury bills safe? A: T-bills are backed by the full faith and credit of the U.S. government, which has never defaulted. They have zero credit risk and near-zero interest rate risk because of their short maturities. The only way to lose money is to sell before maturity at a time when rates have risen enough to push the price below your purchase cost, which is rare for bills under 6 months.

Q: What is the difference between a T-bill, a T-note, and a T-bond? A: The distinction is maturity. T-bills have maturities of one year or less and pay no coupons. T-notes have maturities of 2 to 10 years and pay semiannual coupons. T-bonds have maturities of 20 to 30 years and also pay semiannual coupons. All three are backed by the U.S. government. The longer the maturity, the higher the interest rate risk.

Q: How do I buy T-bills? A: The two main methods are TreasuryDirect.gov, where you buy directly from the government at auction with no fees, or through a brokerage account that offers T-bills at auction and on the secondary market. The minimum purchase is $100, and increments are $100. Brokerages are more flexible because you can sell before maturity.

Q: Do I pay taxes on T-bill interest? A: T-bill interest is subject to federal income tax but exempt from state and local taxes. You will receive a Form 1099-INT at tax time showing the interest earned. If you buy through TreasuryDirect, the interest is reported in the year the bill matures. If you sell before maturity through a brokerage, any gain is reported as a capital gain or interest depending on how long you held it.

Q: What happens if I need my money before the T-bill matures? A: If you bought through a brokerage, you can sell on the secondary market. The price may be slightly above or below your purchase price depending on rate movements. If you bought through TreasuryDirect, you must transfer the bill to a brokerage first, which takes several days, then sell. This is why TreasuryDirect is better for bills you plan to hold to maturity.