Treasury Bills vs. Bonds: Which Should You Invest In? (2024)

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The Federal Reserve began a series of aggressive interest rate hikes in 2022 to combat high inflation, creating a boon for investors looking for a place to safely grow their savings.

Treasurys are offering some of their highest yields since the 2000s. Before deciding whether or not to invest in them, it’s important to understand the difference between the various kinds. Treasury bills and Treasury bonds are two types of Treasurys that have been rising in popularity due to their backing by the U.S. government and strong interest rates that are outpacing inflation.

But which one is the better option for you? We've broken down the primary differences between Treasury bills and bonds to help you decide which should be in your portfolio.

Table of Contents

  • What are Treasury bills?
  • What are Treasury bonds?
  • Differences between Treasury bills and bonds
  • What to consider before investing in Treasury bills vs. bonds
  • Treasury bills vs. bonds FAQs

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What are Treasury bills?

Treasury bills, also known as T-bills, are short-term investments issued by the U.S. government. They can be purchased in increments of $100 up to $10 million, have maturities ranging from four weeks to one year and are sold at a discount to their face value. For example, a $1,000 Treasury bill that matures in one year may be sold for $950, with the investor receiving the full face value of $1,000 at maturity.

These types of securities are also called zero-coupon bonds because they don’t pay interest during the time between purchase and maturity. Instead, they’re sold at a discounted rate and repaid in full when they mature. The difference between the discounted rate and the full price at maturity is the same as the advertised interest rate for Treasury bills.

Treasury bills are considered one of the safest investments you can make since they are backed by the full credit of the U.S. government, which has never defaulted on its debts. Treasury bills can be purchased directly from the U.S. Department of the Treasury through auctions held on its TreasuryDirect website or through mutual funds, banks, secondary markets, brokerages or financial advisors.

There are two different types of Treasury bill auctions: competitive and noncompetitive. In a competitive auction, investors bid on the rate they’re willing to accept for the Treasury bill. Depending on the results of the auction, the investor will have their full order filled, only a portion filled or none of it filled. Competitive bidders are allowed to bid up to 35% of the initial offering amount.

In a non-competitive auction, investors commit to buying the Treasury bill at the rate created by the competitive auction, but their full order is always filled (up to $10 million per auction).

Pros and cons of investing in Treasury bills

Pros

  • Low risk: Treasury bills are backed by the full faith and credit of the government, making them a very low-risk investment option. They also have a very short maturity date, so investors are not exposed to long-term market risks and are able to access their funds after brief periods.
  • High liquidity: Treasury bills are highly liquid, meaning they can be easily bought and sold in the secondary market.
  • Inflation hedge: When interest rate returns on Treasury bills are higher than inflation, Treasury bills can be used to hedge against the effects of inflation.
  • Low minimum investment: Treasury bills have a very low minimum investment amount of $100.
  • Low cost: If purchased directly from the government through TreasuryDirect, Treasury bills have no commission fees or costs aside from the price of the Treasury bills themselves.
  • Tax advantages: Interest earned on Treasury bills is exempt from state and local taxes.

Cons

  • Low returns: Treasury bills typically have lower returns compared to other investment options like stocks, exchange-traded funds (ETFs) or real estate.
  • Auction system: TreasuryDirect's auction system can be complicated and confusing for some investors. It can also result in bidders not receiving the bills they want.
  • Short-term investment: Treasury bills are short-term investments, meaning investors have limited ability to capitalize on long-term market trends.

What are Treasury bonds?

Like Treasury bills, Treasury bonds (T-bonds) are a type of debt security issued by the U.S. government, meaning they are backed by the full faith and credit of the federal government. However, unlike T-bills, Treasury bonds are longer-dated securities that mature in 20 or 30 years and pay a fixed rate of interest every six months until the date of maturity.

Treasury bonds are generally considered to be one of the safest fixed-income securities available and are often used by investors looking for a reliable source of income that hedges against inflation or produces retirement income.

Similarly to other government bonds, income from Treasury bonds is exempt from state and local taxes. Treasury bonds are sold via the same auction system as Treasury bills and are available at the same minimum and maximum investment amounts.

Pros of investing in Treasury bonds

  • Low risk: Treasury bonds are some of the safest investments available due to their backing by the U.S. government.
  • Tax advantages: Interest earned is exempt from state and local taxes.
  • Long-term investment: Investors have the ability to lock in a fixed rate for up to 30 years.
  • Steady income: Interest is paid semiannually, providing a reliable source of income.
  • High liquidity: These assets can be easily bought and sold in the secondary market.

Cons of investing in Treasury bonds

  • Low returns: Treasury bonds typically offer lower returns than other investments like stocks, ETFs or real estate.
  • Inflation risk: They aren’t protected from inflation, so their value and purchasing power can erode over the long term.
  • Poor diversification: T-bonds alone do not provide adequate diversification for a portfolio as they are highly correlated with other government securities.
  • Auction system: TreasuryDirect’s auction system can be complicated and confusing for some investors.
  • Interest rate risk: If the Fed raises interest rates, investors locked into long-term T-bonds aren’t able to take advantage.

Differences between Treasury bills and bonds

While the two types of securities are both issued and backed by the U.S. government, there are some key differences between Treasury bills and bonds. The following table outlines some of the main distinctions between the two.

Treasury Bills Treasury Bonds
Issuer U.S. government U.S. government
Maturity One year or less 20 or 30 years
Interest Payments Fixed rate determined at auction for non-competitive bids (competitive bids may receive a better rate) Fixed rate determined at auction for non-competitive bids (competitive bids may receive a better rate)
Risk Low risk but low returns Low returns but riskier than Treasury bills due to longer-term maturity and potential for fluctuations in interest rates and inflation
Liquidity High liquidity High liquidity
Minimum Investment $100 from TreasuryDirect $100 from TreasuryDirect

Treasury notes

A third type of Treasury, called notes, are also available. Treasury notes, or T-notes, have terms of two, three, five, seven and 10 years. Like T-bills and T-bonds, they are available through both TreasuryDirect auctions and on secondary markets. Treasury bonds provide investors with the option of intermediate terms, compared to short-term Treasury bills or long-term Treasury bonds.

What to consider before investing in Treasury bills vs. bonds

When deciding which type of Treasury security to invest in, it’s important to consider your investment goals. If you’re looking for a short-term investment with low risk, Treasury bills are a great choice. However, if you’re looking for a longer-term investment that yields semiannual income with a consistent interest rate, buying Treasury bonds is likely the better choice.

Regardless of your decision, it’s important to consider the interest rate, liquidity and risk associated with each security option before making it part of your investment portfolio. The following are some of the most important factors to consider.

Investment horizon

One of the most important factors to consider when deciding whether to invest in bonds or buy Treasury bills is the length of time you’re willing to commit your money. Treasury bills have a maximum maturity of one year, while Treasury bonds can have maturities of 20 or 30 years. This is a significant difference in the amount of time your money is tied up in the investment.

In general, Treasury bills are viewed as a better choice if you want a short-term investment that enables you to either roll the funds back into Treasurys at the maturity date, or into other investments. On the other hand, Treasury bonds are more suitable for longer-term investments if you don't require large returns and are satisfied with the fixed rate.

Risk tolerance

The amount of risk you’re willing to take is another key factor in deciding between Treasury bills and bonds. With Treasury bills, you're only committing your money for no more than a year and as little as four weeks. With Treasury bonds, you’re committing funds to a much longer investment with a fixed rate of return. In one sense, this provides you with more stability since the returns are known ahead of time, but it also means your money is tied up longer.

Yield

Currently, Treasury bills have higher interest rates than bonds but also guarantee a return for a much shorter period. On the other hand, Treasury bonds will provide you with consistent interest income but are currently yielding less than Treasury bills. In terms of the secondary market, Treasurys may also be traded at a premium or discount depending on market conditions.

Liquidity

Treasury bills are highly liquid investments. While you can easily sell your Treasury bills at any time prior to maturity, you may have to wait until Treasury bonds reach maturity to receive your full return. This means that if you need access to cash quickly, Treasury bills may be a better option as they offer immediate liquidity.

Investment minimum

Both Treasury bills and Treasury bonds have a minimum investment of $100. This allows you to invest even if you don’t have a lot of capital available. In terms of maximum investment, both Treasury bills and bonds are limited to $10 million for non-competing bids and 35% of the total offering amount for competitive bids.

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Treasury bills vs. bonds FAQs

How to buy Treasury bills?

You can purchase T-bills directly from the U.S. Treasury through their online auction system at TreasuryDirect.gov. You can also buy them through a broker, bank, money market mutual fund, secondary market or financial advisor. When purchasing through a broker, you may be required to pay a commission fee as opposed to the no-fee option offered by TreasuryDirect.

How does inflation impact the returns of Treasury bills vs bonds?

Treasury bills and bonds are both affected by inflation, with longer-term bonds typically more sensitive to changes in inflation than shorter-term Treasury bills. T-bills are exposed to less risk of inflation, as they will be paid in full in a shorter period of time. Conversely, Treasury bonds have maturities of significantly longer duration, which exposes them to higher inflation risk over the lifespan of the bond.

How to buy Treasury bonds?

You can also purchase T-bonds directly from the U.S. Treasury Department through their online auction system at TreasuryDirect.gov. You may also buy them through a broker, bank, mutual fund, secondary market or financial advisor.

What are the typical maturity periods for Treasury bills and bonds?

Treasury bills have maturities between four weeks and one year. Treasury bonds have maturities of either 20 or 30 years.

Are there any tax implications when investing in Treasury bills and bonds?

Owners of Treasury bills and bonds are all subject to federal taxes on any interest income received. One of the greatest benefits of investing in Treasurys is that the interest earned is exempt from state and local taxes. This can be a significant benefit for those in higher tax brackets in certain states or municipalities.

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Treasury Bills vs. Bonds: Which Should You Invest In? (2024)

FAQs

Treasury Bills vs. Bonds: Which Should You Invest In? ›

Compared with Treasury notes

Treasury notes
What Is a Treasury Note? A Treasury note (T-note for short) is a marketable U.S. government debt security with a fixed interest rate and a maturity between two and 10 years. Treasury notes are available from the government with either a competitive or noncompetitive bid.
https://www.investopedia.com › terms › treasurynote
and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.

What would be the best reason to invest in US Treasury bonds? ›

Pros of Investing in Treasury Bonds

Tax benefits: The interest income from Treasury bonds is subject to federal income tax but exempt from state and local income taxes. This can be particularly beneficial for investors in high-income tax states, as it allows them to avoid additional taxation on their interest income.

Is it a good time to buy Treasury bonds? ›

This time has been different: The 10-year Treasury yield has been hovering in a range above where it was when the Fed last hiked in July 2023. We believe the historical relationship should hold and we expect the 10-year Treasury ultimately to decline modestly from current levels as growth and inflation slow.

What is the disadvantage of investing in Treasury bills? ›

This means that investors looking for high returns may not find T-bills attractive. Since T-bills have fixed interest rates, inflation can erode the purchasing power of the returns earned from these investments. This means that investors may need help to keep up with inflation, resulting in a decline in real returns.

Why buy a CD over a Treasury bill? ›

CD and Treasury bill rates offer similar rates for terms of one to six months. CDs are paying higher rates than Treasury bills and Treasury notes for terms of one to five years. Treasuries are exempt from state income taxes, which is an important advantage when rates are nearly the same.

Are treasury bills a good investment now? ›

Are Treasury bills a good investment? Ultimately, whether Treasury bills are a good fit for your portfolio depends on your risk tolerance, time horizon and financial goals. T-bills are known to be low-risk short-term investments when held to maturity since the U.S. government guarantees them.

Are treasury bills good for retirement? ›

Investors Near or in Retirement

A portfolio that includes Treasury bonds, bills, or notes, provides safety and helps to preserve their savings since Treasuries are considered risk-free investments.

Why not to buy Treasury bonds? ›

So, the risks to investing in T-bonds are opportunity risks. That is, the investor might have gotten a better return elsewhere, and only time will tell. The dangers lie in three areas: inflation, interest rate risk, and opportunity costs.

Do Treasury bonds go down when interest rates rise? ›

Why interest rates affect bonds. Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.

Are bonds better than Treasury bills? ›

Compared with Treasury notes and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.

Can you lose principal on treasury bills? ›

The No. 1 advantage that T-bills offer relative to other investments is the fact that there's virtually zero risk that you'll lose your initial investment. The government backs these securities so there's much less need to worry that you could lose money in the deal compared to other investments.

Why would anyone bother investing in Treasury bills? ›

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.

How much does a $1000 T-bill cost? ›

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.

How to ladder T-bills? ›

You need to purchase several T-Bills with staggered maturity dates. You can buy & build a T-bill ladder through most brokerage firms or through treasurydirect.gov. You can also set up an automatic laddering system on the US Treasury website so you won't have to worry about micromanaging your investments.

Do you pay taxes on treasury bills? ›

Key Takeaways

Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes.

Do banks charge to buy T-bills? ›

When you buy T-bills through your bank, it may charge you additional fees and expenses such as sales commissions or transaction charges. These extra costs can add up over time and eat into your returns on your investment.

What is the purpose of the US Treasury bonds? ›

Treasury bonds (T-bonds) are one of four types of debt issued by the U.S. Department of the Treasury to finance the U.S. government's spending activities.

Is it a good idea to invest in Treasury I bonds? ›

I bonds are great, safe investments. But they're paid out at the end of their 30-year maturities. Yes, you can cash them in after 12 months. If you redeem an I bond within five years of purchase, however, you forfeit the last three months' interest.

Why would I want to invest in bonds? ›

Investors buy bonds because: They provide a predictable income stream. Typically, bonds pay interest on a regular schedule, such as every six months. If the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing.

Why would people invest in a US savings bond? ›

In general, when interest rates are higher, demand for fixed-rate savings bonds like Series EE tends to increase. However, when people expect inflation to increase, savings bonds like Series I become attractive because they provide protection against inflation, preserving the value of the money invested.

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