Learn About Buying Treasury Bills and Bonds

Understanding What Treasury Bills and Bonds Are

Treasury bills and bonds are debt instruments issued by the U.S. Department of the Treasury to raise money for the federal government. When you purchase a Treasury bill or bond, you are essentially lending money to the government. In return, the government promises to pay you back with interest. These securities are considered among the safest investments available because they are backed by the full faith and credit of the United States government.

The main differences between Treasury bills and bonds relate to their maturity dates and how interest is paid. Treasury bills, often called T-bills, are short-term securities with maturity periods of four weeks, eight weeks, 13 weeks, or 26 weeks. They are sold at a discount to their face value, meaning you pay less than the stated amount upfront. When the bill matures, you receive the full face value. The difference between what you paid and what you receive at maturity represents your earnings.

Treasury bonds, by contrast, are long-term securities with maturity dates of 20 or 30 years. Unlike T-bills, bonds pay interest twice per year to the holder. These interest payments are called coupon payments. When the bond reaches its maturity date, you receive the full face value along with the final interest payment.

There is also a middle ground called Treasury notes, which mature between 2 and 10 years. Treasury notes work similarly to bonds in that they pay interest twice yearly, but they have shorter time horizons.

As of 2024, Treasury securities are held by various parties: foreign governments and institutions hold approximately 30 percent of outstanding Treasuries, domestic investors and financial institutions hold roughly 40 percent, and the Federal Reserve holds about 20 percent. Individual retail investors hold the remaining portion.

Practical Takeaway: When considering Treasury securities, think about your time horizon. If you need your money back within months, T-bills may suit your needs. If you can leave your money invested for years and want regular income payments, Treasury notes or bonds might be more appropriate.

Where and How to Purchase Treasury Bills and Bonds

You can purchase Treasury securities through several channels, and each has different requirements and features. The most direct method is through TreasuryDirect, which is the official online platform operated by the U.S. Department of the Treasury. TreasuryDirect allows individual investors to purchase securities directly from the government without paying commissions or fees. To use TreasuryDirect, you need a Social Security number or employer identification number, a valid email address, and a U.S. bank account.

Setting up a TreasuryDirect account involves creating an online profile, verifying your identity, and linking your bank account. Once your account is established, you can bid on or purchase securities during designated offering periods. The auction schedule is published in advance, typically showing offerings several weeks ahead. For example, the Treasury typically holds auctions for 4-week and 8-week T-bills every week, while 13-week and 26-week T-bills are auctioned every four weeks.

Another way to purchase Treasuries is through a broker, bank, or investment firm. Major financial institutions like Fidelity, Vanguard, Charles Schwab, and others allow you to purchase Treasury securities through their platforms. Using a broker is convenient if you already have an investment account with them, though you may pay a small fee or commission. These fees typically range from $0 to $25 per transaction, depending on the firm.

You can also purchase Treasury securities through a bank. Some banks offer Treasury purchases directly, though not all do. Banks that provide this service may charge modest fees.

The auction process is straightforward. When you participate in an auction through TreasuryDirect, you submit a competitive or non-competitive bid. A non-competitive bid means you agree to accept whatever interest rate the auction determines. A competitive bid means you specify the yield you are willing to accept. Most individual investors use non-competitive bidding because it is simpler and guarantees your bid will be accepted as long as you submit it by the deadline.

Practical Takeaway: If you want to avoid paying fees and prefer a straightforward process, TreasuryDirect is an excellent option. If you prefer having a broker manage the transaction or want more services, using a financial institution may be worth any modest fees charged.

Understanding Interest Rates, Yields, and Current Market Conditions

The interest rate on Treasury securities is determined through an auction process. When the Treasury holds an auction, the interest rate that emerges reflects market demand for the security and broader economic conditions. In 2024, Treasury yields have ranged significantly based on maturity. For example, 4-week T-bills have yielded between 4 and 5 percent, while 52-week T-bills have yielded between 4 and 5.5 percent. Longer-term securities like the 10-year Treasury note have yielded between 3.5 and 4.5 percent during this period, while 30-year bonds have yielded between 4 and 4.5 percent.

It is important to understand the difference between coupon rate and yield. The coupon rate is the fixed interest rate printed on the bond or note at issuance. This rate does not change over the life of the security. Yield, however, is the actual return you receive based on what you pay for the security. If you purchase a Treasury note at its original issue price and hold it to maturity, the yield you receive equals the coupon rate. However, if you purchase an already-issued Treasury security in the secondary market at a price different from its face value, your yield may differ from the coupon rate.

Economic conditions significantly affect Treasury yields. When inflation is high, the Federal Reserve often raises interest rates to combat it, which typically increases Treasury yields. When the economy is slowing or in recession, investors often seek the safety of Treasury securities, which can drive prices up and yields down. The yield curve, which compares yields across different maturities, provides clues about market expectations for future economic conditions. When short-term yields are higher than long-term yields, economists call this an inverted yield curve, which has historically preceded economic recessions.

As of mid-2024, the Federal Reserve has held interest rates relatively steady after a series of increases that began in 2022. This environment has meant relatively stable yields on Treasury securities compared to the volatility seen in 2022 and 2023. Historical context shows that Treasury yields were near historic lows in 2021, when the 10-year note yielded around 1.5 percent. By late 2023, these same securities were yielding over 4 percent.

Practical Takeaway: Monitor current Treasury yields before purchasing. Compare yields across different maturities to understand what the market expects for future rates. If you believe rates will fall, longer-term securities might offer better returns. If you think rates will rise, shorter-term securities allow you to reinvest at higher rates more frequently.

Calculating Returns and Understanding Pricing

Calculating your potential return on a Treasury investment depends on whether you are purchasing a T-bill or a Treasury note or bond. For T-bills, the calculation is relatively simple. You purchase the security at a discount, and the difference between your purchase price and the face value is your return. For example, if you purchase a 26-week T-bill with a $1,000 face value for $975, you will earn $25 when the bill matures. This represents a return of approximately 2.5 percent for the 26-week period, or roughly 5 percent annualized.

For Treasury notes and bonds, calculating returns is slightly more complex because they pay interest twice per year. Let's say you purchase a Treasury bond with a face value of $1,000 and a coupon rate of 4 percent. This bond will pay you $20 every six months (4 percent divided by two). Over a year, you receive $40 in interest payments. Additionally, when the bond matures, you receive the full $1,000 face value. If you hold the bond until maturity, your total return is straightforward: interest payments plus the principal repayment.

However, if you sell a Treasury security before it matures, the price you receive depends on current market conditions. Treasury prices and yields move in opposite directions. When yields rise, existing bond prices fall because new securities offer better returns. Conversely, when yields fall, existing bond prices rise because they offer