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Government bonds provide a low-risk way to invest. Gains may lag behind higher-risk assets like stocks, but they can help diversify your portfolio and provide a steady stream of reliable income. Treasury bonds and Treasury bills work a little differently, but both are debt securities that are available through the federal government. Each has its own pros and cons. Here's what you need to know about how Treasury bills compare to bonds—and how to pick the right option for you.
What Are Treasury Bills?
Treasury bills, also known as T-bills, are short-term bonds with terms ranging anywhere from four weeks to one year. They offer a fixed interest rate that's paid when the bill matures. Treasury bills are available via auction at a discount of their face value, which is the bill's value when it's first issued. It's also the amount you'll get back upon maturity. Auctions occur weekly for bills that take less than a year to mature. For 52-week bills, auctions happen every four weeks.
Pros and Cons of Investing in Treasury Bills
Pros
- Good for short-term investing: If you have a short investment timeline, T-bills can be a good option—especially if you're looking for a low-risk investment. As of November 2023, 26-week Treasury bills had yields of over 5%.
- Liquidity: Thanks to their short maturity periods, you won't have to wait too long to earn interest. You can also sell a T-bill before it matures without penalty, though there's no guarantee that you'll recoup your investment. Still, T-bills offer more liquidity than low-risk investments like certificates of deposit (CDs).
- Tax benefits: Earned interest is subject to federal income tax but exempt from state and local taxes.
Cons
- Modest returns: As of November 2023, yields were just over 5%. Contrast that with the stock market, which has had average annual returns of about 10% for the past century. Of course, stock investing comes with more risk.
- Sensitive to rising interest rates: If rates begin increasing after you've purchased a T-bill, you'll be stuck with a lower rate until it matures.
- Delayed interest payments: With a Treasury bill, you won't receive an interest payment until the term ends. That could be an issue if you're looking for a regular source of income.
What Are Treasury Bonds?
Treasury bonds (T-bonds for short) are designed for long-term investing. They're available in 20- and 30-year terms and pay interest every six months. The rate is fixed, so interest payments stay the same for the life of the bond. As of November 2023, the interest rate on both 20- and 30-year Treasury bonds was 4.75%. Like Treasury bills, they're available for purchase via auction through TreasuryDirect.gov. You can also go through a bank, broker or dealer. Auctions occur four times a year for original issues; eight times a year for reopenings.
Pros and Cons of Investing in Treasury Bonds
Pros
- Low risk: If you're a conservative investor with a low appetite for risk, Treasury bonds might be worth considering. They aren't known for offering robust returns, but it's highly unlikely that you'll lose money.
- Tax perks: Like T-bills, you won't owe state or local taxes on interest earned from Treasury bonds. However, you'll owe federal taxes each year until the bond matures.
- Attractive during retirement: Keeping a portion of your nest egg in T-bonds can expose you to less risk when compared to the stock market. It can also provide regular interest payments when you're no longer working.
Cons
- Lackluster returns: CD yields are often higher when compared to Treasury bonds. As of November 2023, some CD rates were as high as 5.75%.
- Vulnerable to inflation: The price of consumer goods can increase significantly over the course of 20 or 30 years. Inflation can gradually diminish the value of your interest payments.
- Affected by rising interest rates: When you buy a Treasury bond, you're locked into its interest rate until it matures—which will be at least two decades away. That means you'll miss out if rates eventually increase.
Treasury Bills vs. Bonds
| Treasury Bonds | Treasury Bills | |
|---|---|---|
| Best for | Long-term investing | Short-term investing |
| Time to maturity | 20 or 30 years | Four weeks to one year |
| Interest payment schedule | Fixed payments every six months | Fixed payment when the bill matures |
| Tax treatment | Federal income tax due annually; exempt from state and local taxes | Interest subject to federal income tax; exempt from state and local taxes |
| Risk level | Low | Low |
The Bottom Line
Both Treasury bonds and Treasury bills are low-risk debt securities issued by the federal government. T-bonds are designed for long-term investing, while T-bills have much shorter maturity periods. Both can help diversify your investment portfolio while shielding you from state and local taxes. The right one for you will depend on your investment timeline and financial goals. Keep in mind that stock investing, while riskier, is often necessary to fuel long-term growth.
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