What Are Treasury Bills?
A Treasury Bill (T-Bill) is a short-term debt security, backed by the U.S. treasury department. Treasury Bills are issued by the U.S. Government and allow investors to loan money for government spending. T-Bills have various maturity durations of one year or less.
Why Does The Government Issue Treasury Bills?
When the government needs to raise cash for various expenses, it will issue debt securities such as T-Bills. These expenses may include infrastructure, salaries, or military expenses. The government effectively borrows money from the purchaser of these securities and returns their money, along with interest at the maturity date.
Why Buy A Treasury Bill?
Treasury Bills are a very popular security class amongst investors with a low-risk tolerance and short-term orientation. This is because T-Bills have zero default risk. Investors may purchase these securities either through a broker or directly from the government. T-Bills are sold at a discount to par value. Upon maturity, investors will receive the full par value. For example, if an investor purchases a T-Bill with a par value of $100 for $97, they will receive $100 on the maturity date.
What Determines The Price of a T-Bill?
Several factors may change the supply and demand for Treasury Bills, thus causing changes in the yield and price of these securities. These factors include monetary policy, macroeconomic conditions, and investor risk tolerance. Maturity length also influences the prices. Typically, Treasury securities with longer maturity dates will be sold at larger discounts. The risk environment in the financial markets plays a major role in T-Bill price action. In an environment where high-risk assets, such as equities are attractive, T-Bills are seen by some as a waste of time, leading to decreases in T-Bill prices.
Why Not Buy a Treasury Bill?
So, T-bills clearly seem like a risk-free way to preserve and grow capital… why not purchase one? One problem with T-Bills is their often lack of real yield. Real yield measures a security’s yield minus inflation. Because of the relatively low typical yield on Treasury securities, they seldom outperform inflation. However, in times of great uncertainty, they may be an investor’s only safe place to allocate their portfolio.