What Is a Treasury Bill (T-Bill)?
A Treasury bill is a short-term IOU from the U.S. government, issued with maturities of 4, 8, 13, 17, 26, or 52 weeks. Because it is backed by the full faith and credit of the U.S. government, the market treats a T-bill as having essentially no default risk.
Unlike longer-dated Treasury notes and bonds, T-bills pay no periodic interest. Instead, they are sold at a discount to their face value, and the investor's return is the difference between the purchase price and the full face value received at maturity.
How T-Bills Work
The Treasury sells bills through regular auctions, where institutional investors submit competitive bids and individuals can buy at the auction-clearing yield. After issuance, T-bills trade in a deep and highly liquid secondary market, making them easy to buy or sell at any time.
The yield on short T-bills tracks the federal funds rate closely, so when the central bank raises or cuts rates, bill yields move almost immediately. This makes T-bills the practical benchmark for the risk-free rate used across finance, from CAPM to money market fund yields.
Example
Suppose you buy a 52-week T-bill with a 1,000 dollar face value for 952 dollars. At maturity the government pays you 1,000 dollars, so you earn 48 dollars on a 952 dollar investment, a return of 48 / 952 = about 5.0 percent for the year.
There were no coupon payments along the way; the entire return came from buying below face value. Shorter bills work the same way, just with the discount scaled to the holding period.
Why It Matters
T-bill yields serve as the risk-free anchor for pricing nearly everything else in markets, since riskier assets must offer a premium over what the government pays. They are also a core holding for money market funds, corporate treasuries, and investors parking cash.
For anyone heading into markets roles, understanding bill auctions, discount pricing, and the link between bills and central bank policy is foundational, because the short end of the curve is where monetary policy first hits real prices.
