Dear Dr. Don,
Do Treasury bills come in different prices? How does one know the interest rate they pay? Is a Treasury bill safer than a CD? Any other information on Treasury bills would be welcome.
— Bill Buyer
The U.S. Treasury issues bills, notes and bonds. Treasury bills have a final maturity of a year or less. Treasury notes are issued in two-, three-, five- and 10-year maturities. The Treasury bond has a final maturity of 30 years from its issuance date. Treasury inflation-protected securities (TIPS) are issued in five-, 10-, and 20-year maturities.
There’s a weekly auction of 30-day, 91-day and 182-day Treasury bills, more commonly called the one-month, three-month and six-month bills. A 52-week Treasury bill is auctioned monthly.
Treasury bills are discount securities. That means that they don’t pay coupon interest. Instead, the bills are sold at a discount and mature at face value. The difference in price is your interest payment. Investopedia has a “Treasury Bill Price Calculator.”
The Treasury changed its minimum denominations in the spring of 2008 so you can now buy Treasury bills, notes and bonds in minimum denominations of just $100. At this size, it really only makes sense to buy through TreasuryDirect, because there’s no commission on the purchase.
There is a commission charged, currently $45, if you sell the security before it matures — so you should plan on holding until maturity.
To buy using TreasuryDirect, you have to enter a noncompetitive bid on the Treasury bill before it is auctioned. By bidding noncompetitively, you agree to accept whatever discount rate is determined at auction.
The TreasuryDirect Web page “Treasury Bills: How To Buy” explains it all in greater depth.
An FDIC-insured CD and a U.S. Treasury bill are both backed by the full faith and credit of the U.S. government. Treasury bills will fluctuate in market value with changes in the interest-rate environment, but you will receive face value at maturity. Treasury securities have a tax advantage in that the interest income is not subject to state and local taxes.
It’s hard for Treasury bills to compete with CDs in the current interest-rate environment. Banks are competing with each other for deposits, but the U.S. government is seeing a lot of investors flock to its Treasury securities for the safety they offer for large investments.