From the Treasury Direct website, I saw this

Bills: U.S. Treasury Bills are a type of short-term security of one year or less, usually issued at a discount. The discount is the amount the security is lowered from its face value and is considered the earned interest when the security matures. For example, if you purchase a $10,000 26-Week Bill at $9,750 and hold it until maturity, the interest you earn is $250.

Basically this seems to say: give us your money, and in half a year we'll give it back to you. Why would anyone do this rather than 1) putting it in a bank account to earn small interest, or 2) just keeping it under a mattress in case it was needed?


I understand now why it makes sense to buy T Bills, but since the answer is obvious for so many people perhaps it makes sense to explain in more detail why the above text could be confusing. It says 'issued at a discount', so the security is 'lowered from its face value'. If these terms are not already understood, the example does not help, because it can be read two ways: either the government sells me a $10,000 bond that earns $250 interest for $9,750 (what actually happens), or it sells me a me a $9,750 bond that earns $250 interest for $10,000 (what I thought it was describing).

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    Treasury Bills are practically risk-free. You will get your money back, with a little interest. – Jan Mattsson Jan 9 at 13:21
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    Why would you opt for the small interest of a savings account if this clearly has a higher payoff? Keeping 10K in a mattress is just stupid. – kevin Jan 9 at 15:12
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    @Wapiti, your edit does a lot to clarify your confusion. Bonds are really interesting and return based on discounted future value and coupon payments is substantially different than the way most people interact with savings and investing. Anyway, +1 on the question and welcome to the money stack. – quid Jan 9 at 23:31
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    @Wapiti If your question is about your confusion between what it actually means and what you thought it meant, then this question may be better suited to english.stackexchange.com as it involves the parsing of the words and not any real financial question – Kevin Jan 10 at 13:27
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    Since you dropped your first suggestion and are on to a new one, let me be less gnomic. By not understanding I mean no understanding, not even a wrong one. That’s confusion. By misunderstanding I mean wrong understanding. That’s false clarity. Misunderstanding is a very interesting subject. It causes boats to sink because of trusting faulty instruments, and egyptologists to abandon the Valley of the Kings before discovering the greatest treasure in archeological history. Synonyms for misunderstanding are things like misconstrual and misreading. Maybe check out english.stackexchange.com ;) – Wapiti Jan 10 at 17:18

10 Answers 10


No, what it says is “In half a year, we’ll give whoever holds this bond $10,000 for which you pay us $9,750 now”.

This is equivalent to an annual interest rate of about 5% (the example is showing a yield way more than currently available). Plus you can sell the bond to another person in the meantime.

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    @Wapiti Yes, the face value of a Treasury bill is the final amount it can be redeemed for; the purchase price is somewhere below that. – Nuclear Wang Jan 9 at 14:02
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    Ah I see. I interpreted that as saying: we sell $9750 worth of bills to you for $10000, and they collect $250 of interest. But that would be a premium, not a discount. The world makes sense again. – Wapiti Jan 9 at 15:48
  • If the rate of inflation exceeds the interest rate at some point, does this pose problems for the holder of T-bills? – JacobIRR Jan 9 at 17:52
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    @JacobIRR, inflation risk comes with any kind of bond or loan. You take inflation risk when you buy a CD. Your bank takes on inflation rate risk when they give you a mortgage. – The Photon Jan 9 at 18:19
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    @Wapiti to turn your world back on its head: a couple of years ago, some European countries issued negative yield bonds, and people still bought them. forbes.com/sites/kenrapoza/2017/03/06/… – rumtscho Jan 9 at 18:22

Welcome Wapiti!

Treasury Bills (T-bills) does seem like an oddball but it might work for some folks.

I'm going to address it both your questions individually as interest and liquidity.

1) Interest

Looking at the Department of Treasury's site for rates (https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=billrates, Jan 8, 2019) I see the range is 2.40-2.60% depending on the timeframe (4 weeks - 52 weeks).

This appears mostly comparable to the top savings rates (2.00-2.45%, viewed Jan 8, 2019) found on Bankrate: https://www.bankrate.com/banking/savings/rates/

From an interest perspective, it's essentially the same. What needs to get taken into account are the amounts involved and any special hoops to jump through to avoid fees.

Some of the special savings rates found on Bankrate require a minimum balance. The top rate (2.45%) requires $25,000 balance while the second highest rate (2.39%) requires only $1. Each financial institution (FI) may have their own requirements to avoid any maintenance fees: electronic statements, use debit card X/mo, direct deposit, etc.

For amounts under $250,000, your money is insured by the FDIC (banks) or NCUA (credit unions) if your FI fails. For funds above that, you'll need to either open additional accounts or have them at other FIs to keep your money safe.

T-bills can be purchased in $100 increments, so there is no minimum balance requirement other than the purchase itself. It's also guaranteed by the US Government, so it's considered a risk-free investment (https://www.investopedia.com/ask/answers/013015/how-are-treasury-bills-taxed.asp).

If you have more than $250,000 that you want saved/invested "risk-free", then T-bills could be an option for this, outside the normal channels.

2) Liquidity

So keeping cash under the mattress has the advantage of being extremely liquid: you can take it out whenever you need it. It has the disadvantages of being insecure and losing value due to inflation (and maybe logistics if you have a very large sum of money).

Savings accounts are also very liquid with one catch: you are limited to six withdrawals per month per Reg D (https://www.nerdwallet.com/blog/banking/how-regulation-d-affects-your-savings-withdrawals/). Transactions in person or ATM don't count in this limit. Your money is kept safe and insured up to the $250,000 limit.

T-bills can be purchased in increments of 4-, 8-, 13-, 26-, and 52-weeks. You won't be able to access your money during that time, but you also won't lose it either unless the US Government defaults. It's the same concept as Certificates of Deposit (CDs).

Hopefully this helps answer why someone might choose one over the other.


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    Treasury bills can also be sold to others so you could in fact "access your money during that time" if necessary or desirable. – Kenny Evitt Jan 10 at 14:54
  • Good point @KennyEvitt. Some FIs will let you cash in your CDs early as well with a penalty. My answer was made before Wapiti's edit, so it's not as relevant as the accepted answer. – Allen Jan 10 at 21:54
  • This is the best and most correct answer. Using a bank to hold your money is not an attractive option once you've broken the deposit insurance barrier. The value in T-Bills is primarily for risk management in large institutional and high-net-worth investors' portfolios. Banks can't be trusted with uninsured funds and, unless your mattress is guarded by steel walls and people with guns, keeping millions or more in cash stuffed away there isn't really sensible either. Even if it is guarded by guns and steel, that's a pretty high cost if you have to pay that staff from the mattress. – J... Jan 14 at 12:21

Other answers explain why it would be interesting to buy Treasury Bills, I am going to explain the "discount" concept.

The point here is the mechanism of how those TB are sold to the primary market (big investors, banks, and other entities that will sell the TBs to small investors).

The Treasury is issuing promissory notes of paying a quantity (let's say $1,000) sometime in the future and auctioning them.

If demand is high (instability is high, or other investments give low ROIs) then the primary market will offer more for those notes, so the Treasury gets paid more (let's say $970); the interest for the buyer will be $30.

If demand is low (there are other interesting investments elsewhere) the price drops and and the Treasury will get pay less (let's say $920); the interest for the buyer will be $80.

The difference between the nominal value of the bill and its purchase price is its "discount" (you could read it as "how much the Treasury discounts the bill in order to sell it").

Of course, for the small investor that distinction is meaningless in relation to an usual "bonus": either he is buying in the secondary market (from the primary buyers) and has to accept a discount that has already been set, or even if he can buy in the primary market1 the volume that he is going to buy will not move the price that will be set in the auction2.

1 I am not sure about the USA, but in some countries it is possible.

2 And there are risks with this system, too:

  • If the offer is too low the investor will not get any bills.

  • In the USA (thanks @dave_thompson_085 for the info) and probably other countries, the price is set by accepting bids from higher price to lower price until the bills offered are sold, and the final price for all of the buyers is that of the accepted offer with a lower value. That means that the investors do not know which is the actual purchase price they have commited themselves to (although they do know that at worst it is as high as their bid).

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    US allows 'retail' buyers either through a broker or directly in a program logically called Treasury Direct, though in the latter you can't sell before maturity -- unless you pay a fee to transfer out to a broker. US also uses an unusual auction procedure where competitive bids are selected from highest value going down until reaching the desired volume, but all executed at the lowest value (or highest cost) selected -- what economists call the clearing price; see treasurydirect.gov/instit/auctfund/work/work.htm . Secondary trades are free market, not fixed to the primary. – dave_thompson_085 Jan 9 at 23:49
  • This is a very helpful discussion which gets to the heart of my confusion, and also sheds considerable light on the yield/price inverse relationship. Thanks! – Wapiti Jan 10 at 17:22

For average individuals there isn't much point to this apart from the small interest.

For large amounts of money, there is the problem that bank insurance only applies up to a certain dollar value - currently $250k. Beyond that you're exposed to the risk of the bank defaulting.

Keeping large amounts of physical cash is even more of a risk, against threats internal and external. And it costs money (staff and security time) to move it in and out. Cash handling is expensive even in businesses that do it all the time like supermarkets and casinos.

If you have a lot of money, or if you are the bank, then bonds are much simpler and less risky. They're also available in conveniently large denominations.

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    Exactly. A lot of the answers focus on retail banking (the average joe). If you have a billion dollars to look after, banks start to look very risky and government bonds - even at negative yields - are a lot safer. – Oscar Bravo Jan 10 at 6:38

That non-specific example illustrates about 5% annually; which is pretty good and about double the current actual market for a 6-month treasury.

Treasuries are marketable securities so you can sell it whenever you feel for whatever the market rate is at the time.


For the last few years, the interest rate of Japanese government bond is negative. That is, you give 100 to them, and they pay you back 99 in 5 years.

The top concern other than earning interest is safety. If you put your money under the bed, it might be stolen or burnt down. Besides, large institutions simply can't have billions in bank notes stored in their office. If you put your money in a commercial bank to earn small interest, the bank might fall and you never get your money back.

The treasury bill or other government bonds are backed by the government, who has the authority to print money, so they won't go broke and you always get your money back. (The exception is euro area where governments can't freely print money. Another exception is Russia in the late 90s when they decided that defaulting on their own gov bond was better to the economy than printing quadrillion rubles. Even the US treasury carries the risk of technical default once in a while.)

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    This is a strong reason to favour government bonds over banks. (I don't think the OP realises there is risk associated with banks and mattresses). Any bank can fold and you lose all your money. It takes a lot for a government to default - usually they will just print the money first (US Treasury has been doing that for decades!) – Oscar Bravo Jan 9 at 15:55
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    @OscarBravo - in the US, we don’t have “the bank can fold and you lose all your money.” For the average customer, the government (FDIC) insurance will cover their deposit. I can’t say the same for other countries, but the question appears US-centric. – JoeTaxpayer Jan 9 at 22:36
  • @JoeTaxpayer Good point. I guess the OP is asking from the PoV of an average Joe so probably he'd be covered. But the financial instruments are aimed at institutional investors who would not be covered by FDIC. The more money you have, the riskier banks appear... – Oscar Bravo Jan 10 at 6:43
  • @JoeTaxpayer, that's only for accounts with under 100K, right? (I assume that's what you intended by your "average customer" limiter.) – Wildcard Jan 11 at 2:32
  • $250K - see fdic.gov/deposit/deposits/faq.html – JoeTaxpayer Jan 11 at 2:34

The advantages of the discount auction become more apparent when you consider the number banks are dealing with. You might look at putting $10,000 in a 6 month T-bill, but a bank is going to be looking at numbers in the billions.

At a 2% discount, you hand Treasury $9,800 and that at the end of the term (let's say 1 year to make it simple) you get $10,000 back. That means you are able to spend that discounted $200, invest it elsewhere, or lend it to someone else.

A bank putting $2 billion in the same security will get to use $40 million for other things. It's a subtle but important difference.


Having grown up and spent most of my adult life in New Zealand I personally find the US way of doing things somewhat confusing, while acknowledging that it is great if you are buying a home. I'm sure it is great for businesses as well. I can't remember a time over the 46 years of my life in NZ when banks paid less than 3.5% on an open savings account, which had no limit on transactions. CD's were 4.5 - 5%, on a par with Government bonds, or you could buy the lottery version, which gave you the possibility of earning a higher rate if you had a lot of money to invest. Unfortunately I guess the vagaries of exchange rates make it difficult for small investors in the US to take advantage of higher interest rates in other Western countries.


Another point to consider is taxes. Interest paid by the US Federal Government is exempt from State taxes and therefore has a overall better yield than an equivalent interest rate paid by the banks.


It makes sense to use them in a portfolio strategy. Think of a portfolio as a recipe, and t-bills are an ingredient.

When you make a portfolio you are looking to maximize return at a certain level of risk, minimize risk at a certain level of return, or some optimal combination of the two, related to the clients risk profile (I.e. if you are 25 you should take some risks to maximize returns, if things go bad you have time to make it up, if you are 65 you can’t take those risks, therefore your potential return is also diminished)

Portfolios are recipes that generate a less uncertain (but lower) result when they use two assets that are negatively correlated. The classic example is airlines and oil companies: When oil gets cheap airlines make bank, and oil companies hurt. When oil gets expensive it’s the other way. Buy stocks on BOTH sectors and you are mostly immune to variations in the price of oil.

So what is negatively correlated with T-Bills? Think of the value of money itself. When the economy overheats there is more demand than there are goods and services available for purchase, so prices go up. That is inflation, it means money is worth less than before, and your T-Bills can actually lose value in terms of their real purchase power. So who gains in that scenario? The people making the goods and services that are in such high demand that the prices keep going up. In other words, stocks in companies like airlines and oil producers.

Now think of the opposite scenario: bankers get jealous of the bonuses hedge fund guys were getting, so they lobby for financial deregulation, doing away with the protections that kept the system stable. Their reckless gambling wrecks the economy, people lose their jobs, the housing market crashes and people stop buying stuff. Now there is cheap stuff to buy everywhere, because nobody has money to buy anything. In that scenario the value of the money invested in T-bills went UP, you can buy more stuff with the same money. Stocks in the other hand crashed, because nobody has the money to buy stuff. (Except for the bankers. It wasn’t their own money they were gambling with after all, but there aren’t enough of them). In that crazy scenario (aka 2008) your portfolio still worked, one cancelled the other.

  • Another hedge strategy is matches and fire insurance. If the insurance companies are paying out a lot and your investment drops, at least people must be buying matches! – Oscar Bravo Jan 10 at 6:47

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