# Treasury bill

In the U.S.Treasury bills (T-bills) are short term debt instruments issued and backed by the "full faith and credit" of the U.S. treasury. Treasury bills are issued for terms of 4, 13, 26, and 52 weeks.[note 1]

Treasury bills are sold at regular auctions, where institutional investors bid on the prices they are willing to pay the treasury for its debt. [1] Bills are issued at a discount to face value and reach full value (par value) at maturity. The difference between the discount price and par value is the interest earned. The regular issuance of an auction priced U.S. T-bill dates from Dec. 17, 1929. [2]

## Treasury bill interest

The formula for computing the yield of a T-bill:

${\displaystyle {\text{Discount Yield}}(\%)={\frac {{\text{Face Value}}-{\text{Purchase Price}}}{\text{Face Value}}}\times {\frac {\text{360}}{\text{Days Till Maturity}}}\times 100[\%]}$

## Purchasing treasury bills

T-bills can be purchased from banks, brokers, and directly from the treasury through Treasury Direct. As noted, T-bills are auctioned in four maturities: [note 2]

• 4-Week Bill: also called a "one month" or "30-day" T-bill.
• 13-Week Bill: also called a "three month" or "90-day" T-bill.
• 26-Week Bill:also called a "six month" or "180-day" T-bill.
• 52-Week Bill:also called a "one year" or "360-day" T-bill.

All bills except 52-week bills are auctioned every week. The 52-week bill is auctioned every four weeks. [3]

Investors can also gain access to Treasury bills by investing in a U.S. Treasury money market fund. [note 3]

Current T-bill rates are provided in the price chart to the right.

## Historical returns

Figure 1. 3-month T-Bill Returns (1928 - 2011) [4]

From 1928 to 2016, U.S. three-month T-bills provided investors with a 3.42% compound annual return. With 2.93% compound annual inflation, the real return over this history has been 0.49%. [5]

During this span, the annual returns have ranged from 0% and 15%, with the return ranging from 0% to 5% in 59 years. Historically, T-bills have realized the highest returns during the inflationary 1970's and early 1980's. T-bills have realized the lowest returns during the years of the Great Depression (the 1930's); during the 1940's, when interest rates were price controlled ("pegged") by the Federal Reserve; [6] and recently during the "Great Recession" period (2008 - 2014). The table below provides annual return data for three month T-bills and inflation. The historical T-bill returns are represented in the Figure 1. graph to the right.

3 month U.S. Treasury bills vs. Inflation 1928- 2016 [4]
Year T-bill CPI-U
1928 3.08% -1.20%
1929 3.16% 0.00%
1930 4.55% -2.70%
1931 2.31% -8.90%
1932 1.07% -10.30%
1933 0.96% -5.20%
1934 0.32% 3.50%
1935 0.18% 2.60%
1936 0.17% 1.00%
1937 0.30% 3.70%
1938 0.08% -2.00%
1939 0.04% -1.30%
1940 0.03% 0.70%
1941 0.08% 5.10%
1942 0.34% 10.90%
1943 0.38% 6.00%
1944 0.38% 1.60%
1945 0.38% 2.30%
1946 0.38% 8.50%
1947 0.57% 14.40%
1948 1.02% 7.70%
1949 1.10% -1.00%
1950 1.17% 1.10%
1951 1.48% 7.90%
1952 1.67% 2.30%
1953 1.89% 0.80%
1954 0.96% 0.30%
1955 1.66% -0.30%
1956 2.56% 1.50%
1957 3.23% 3.30%
1958 1.78% 2.70%
1959 3.26% 1.08%
1960 3.05% 1.50%
1961 2.27% 1.10%
1962 2.78% 1.20%
1963 3.11% 1.20%
1964 3.51% 1.30%
1965 3.90% 1.60%
1966 4.84% 3.00%
1967 4.33% 2.80%
1968 5.26% 4.30%
1969 6.56% 5.50%
1970 6.69% 5.80%
1971 4.54% 4.30%
1972 3.95% 3.30%
1973 6.73% 6.20%
1974 7.78% 11.10%
1975 5.59% 9.10%
1976 4.97% 5.70%
1977 5.13% 6.50%
1978 6.93% 7.60%
1979 9.94% 11.30%
1980 11.22% 13.50%
1981 14.30% 10.30%
1982 11.01% 6.10%
1983 8.45% 3.20%
1984 9.61% 4.30%
1985 7.49% 3.50%
1986 6.04% 1.90%
1987 5.72% 3.70%
1988 6.45% 4.10%
1989 8.11% 4.80%
1990 7.75% 5.40%
1991 5.61% 4.20%
1992 3.41% 3.00%
1993 2.98% 3.00%
1994 3.99% 2.60%
1995 5.52% 2.80%
1996 5.02% 2.90%
1997 5.05% 2.30%
1998 4.73% 1.60%
1999 4.51% 2.20%
2000 5.76% 3.40%
2001 3.67% 2.80%
2002 1.66% 1.60%
2003 1.03% 2.30%
2004 1.23% 2.70%
2005 3.01% 3.40%
2006 4.68% 3.20%
2007 4.64% 2.90%
2008 1.59% 3.80%
2009 0.14% -0.40%
2010 0.13% 1.60%
2011 0.03% 3.20%
2012 0.05% 2.10%
2013 0.07% 1.50%
2014 0.05% 1.60%
2015 0.21% 0.01%
2016 0.51% 1.60%

## Risk

Figure 2. Annualized T-Bill Yield and Inflation Rate (1928 - 2011) [4] [7]

T-bills are not subject to credit risk (assuming no government currency default) as to the payment of interest and return of capital. However, they are subject to inflation risk, since T-bills do not always outpace inflation. Figure 2. to the right graphically illustrates the data.

In addition, as the short term interest rate can fluctuate significantly over a short period, T-bills are subject to income risk, the chance that interest income will decline because of falling interest rates.

## Role in a portfolio

T-bills can be employed for the following investment purposes:

• General savings vehicle. Short term uses for capital requiring a large amount of cash (car, college tuition, vacation, etc), can be funded with T-bills that will mature just before the date an expense comes due.
• Emergency reserves. T-bills can be used as a part of an investor's emergency fund, designed to provide a cushion of liquidity [8] in the event of unexpected expenses or of a loss of regular income due to unemployment.
• Asset allocation: As part of fixed income allocation in a retirement portfolio.

## Taxation

The interest income from a Treasury bill is exempt from state and local income tax. Due to the fact that T-bills are discount securities, and income is credited at maturity of the bill, individual taxpayers can use T-bills to shift income from one calendar tax year to the next tax year by purchasing a T-bill that matures after December 31 of the current year.

## Notes

1. Compare to Treasury bonds, which are issued by the US Treasury in two maturity ranges (Reference: Treasury Direct: Treasury Securities & Programs):
• Notes have a range between one year and ten years;
• Bonds have a range greater than ten years.
2. The treasury also issues very short term cash management bills which are usually issued with maturities lasting only a matter of days.
3. The following no-load fund groups provide U.S.Treasury only money market funds. Expense ratios, minimum investments, and fund policies should be investigated by prospective investors before investing.

## References

1. Fleming, Michael J. (January 2007). "Who Buys Treasury Securities at Auction?". Current Issues in Economics and Finance, Volume 13, Number 1. Federal Reserve Bank of New York. Retrieved 14 April 2012.
2. Timeline of US Treasury Bills, Treasury Direct. Retrieved 9 April 2012.
3. Individual - Treasury Bills In Depth. Retrieved 9 April 2012.
4. T-bill data source comes from Annual Returns on Stock, T.Bonds and T.Bills: 1928 - Current, Damodaran Online. Retrieved 1 April 2012
5. Annual Returns on Stock, T.Bonds and T.Bills: 1928 - Current, Damodaran Online. Retrieved 1 April 2012
6. Shiller, Robert (1980)."Can the Fed Control Real Interest Rates?". University of Chicago Press ISBN: 0-226-25134-9: 117 - 167. Retrieved 10 April 2012.
7. Inflation data comes from Consumer Price Index 1913 -, Minnesota Federal Reserve. Retrieved 1 April 2012
8. Liquidity, on Investopedia