Treasury bills have a reputation for being institutional — something funds buy rather than individuals. In practice they are among the simplest instruments available: you lend the government money for a fixed short period and receive a known amount at the end.
The mechanics differ from a savings account in one way that causes most of the confusion. There is no interest rate credited monthly. You buy below face value and receive face value at maturity.
How the discount works
Buy a $10,000 bill at a 4.85% discount rate for 182 days and you pay roughly $9,755 today, receiving $10,000 at maturity. Your gain is $245. But $245 on $9,755 held for half a year annualises to about 5.02% — meaningfully higher than the 4.85% quoted, because the discount rate is calculated on face value over a 360-day year while your actual return is on the price you paid.
Always convert before comparingThree different numbers get quoted: the discount rate (the auction convention), the bond-equivalent yield (comparable to a savings APY), and the tax-equivalent yield (what a taxable alternative would need to pay to match after tax). Comparing a discount rate against a savings APY understates the bill every time.
Work out your real yield
The tax advantage, made concrete
Treasury interest is subject to federal income tax but generally exempt from state and local income tax. For a saver in a state with a 6% income tax, a Treasury yielding 5.0% delivers the same after-tax result as a fully taxable CD yielding roughly 5.32%.
That is a large edge to obtain from an instrument with less credit risk than a bank. It is also why the comparison must always be run after tax — in a zero-income-tax state the advantage largely disappears, and a high-yield savings account may simply win on convenience.
Buying them: two routes
| Direct from the treasury | Through a broker | |
|---|---|---|
| Cost | No fee | Usually no fee on new issues |
| Purchase method | Non-competitive auction bid | Auction or secondary market |
| Auto-reinvestment | Yes, schedulable | Varies by broker |
| Selling before maturity | Requires transfer out — awkward | Straightforward, at market price |
| Tax reporting | Separate statement to retrieve | Consolidated with your other holdings |
| Best for | Buy-and-hold ladders | Flexibility and simpler admin |
A non-competitive bid simply means you accept the yield set at auction rather than specifying one. This is the correct choice for individual savers — competitive bidding risks not being filled at all.
Selling early can produce a lossHeld to maturity, a T-bill returns exactly face value. Sold early, it trades at whatever the market will pay, which falls when rates rise. The instrument has no credit risk but it does have price risk if you do not hold it to term — so match the term to your actual need, or hold the money in instant-access savings instead.
Building a rolling ladder
- Pick your access interval.Four-week bills give monthly maturities, thirteen-week bills quarterly. Monthly rolls suit money you might need soon; quarterly reduce admin.
- Divide and buy across terms.For a quarterly ladder, buy 13-, 26-, 39- and 52-week bills simultaneously. After the first year, one matures each quarter and all earn the 52-week rate.
- Set auto-reinvestment.Both routes support scheduled reinvestment. This turns the ladder into a maintenance-free structure that rolls indefinitely.
- Review at each maturity.Take the cash if you need it, otherwise let it roll. This is the same logic as a CD ladder, without the early withdrawal penalty structure.
T-bills, money market funds, or savings?
- T-bills — best after-tax yield for high earners in high-tax jurisdictions; no insurance limit; requires matching term to need.
- Government money market funds — nearly the same underlying assets with daily liquidity and a small management fee. Often the pragmatic choice for balances you may need at short notice; see how the fund types differ.
- High-yield savings — fully liquid, insured, simplest. Wins when the after-tax yields are close, which they frequently are in low-tax jurisdictions.
Above deposit insurance limits the calculation changes materially. Rather than spreading cash across several banks to stay covered, Treasuries carry sovereign backing with no cap — one of the main reasons large cash balances migrate there. If you would prefer to stay in deposits, read how ownership categories multiply coverage.
Limits, errors and borders of the standard advice
Critical reviewGovernment bills became a retail obsession during one particular rate environment, and much of the advice written then is now repeated without its context. Here is where the standard case overstates itself.
"Treasury bills are the risk-free asset."
The claimBacked by the government and short-dated, bills carry no meaningful risk.
Where it breaks"Risk-free" is a term of art from finance theory meaning free of default risk in the issuer's own currency — it was never a claim about your actual outcome. Bills still carry inflation risk, and a period of negative real yields means a guaranteed loss of purchasing power held with complete certainty. They carry reinvestment risk at every maturity. For anyone spending in a different currency, they carry substantial currency risk, which for a foreign holder can dwarf the yield entirely. And even the default-free claim assumes political willingness to pay, which has been publicly tested more than once.
The borderThe label is fair for short-horizon money held and spent in the issuing currency, and the credit quality genuinely is the benchmark. Stop treating it as a synonym for "safe" — compare the yield to inflation, not to zero, and if you spend in another currency treat the position as a currency trade with a yield attached.
"T-bills beat high-yield savings — the yield is higher."
The claimBill yields exceed deposit rates, so bills are the better home for cash.
Where it breaksThe comparison is usually made at a favourable moment and then generalised. Deposit rates and bill yields move differently, and the ordering has reversed repeatedly — a comparison written during one phase of the cycle is quoted as a permanent fact. The tax treatment also cuts both ways and is often mentioned only where it flatters bills: exemption from some local taxes helps in high-tax jurisdictions and is worth nothing in others. And the operational costs are underweighted: a maturity ladder needs managing, purchase mechanics are less convenient than a transfer, and unexpected access means selling in the secondary market at whatever price prevails.
The borderBills are compelling for larger balances, in high-local-tax jurisdictions, and when the yield gap over deposits is wide enough to pay for the friction. For a modest cash balance with an unpredictable draw, a competitive savings account usually wins after tax and effort. Re-check the actual gap rather than trusting an article's vintage.
"Buy individual bills rather than a fund — avoid the expense ratio."
The claimDirect ownership eliminates fund fees, so it must be cheaper.
Where it breaksThe expense ratio on a short-duration government fund is very small, and the direct-ownership alternative has costs that simply are not labelled as fees: your time managing maturities, the risk of missing a rollover and sitting in uninvested cash, potential spreads on secondary-market sales, and the operational complexity of a ladder across many small holdings. Direct holdings also give you no partial liquidity — you own a position that matures on a date, whereas a fund can be sold in any amount on any trading day. For most retail balances the fee saving is measured in single-digit sums per year against meaningful added friction.
The borderDirect ownership makes sense at larger balances, where a specific maturity date matches a specific known liability, or where holding the security directly gives a tax treatment the fund wrapper does not. Otherwise a low-cost short-duration fund is the rational default, and the fee is a fair price for the convenience.
"Hold to maturity and you cannot lose money."
The claimInterim price movements are irrelevant if you hold to maturity, so there is no loss.
Where it breaksNominally true and economically incomplete. You receive the agreed amount, but the loss shows up in two places the claim ignores: purchasing power, if inflation over the holding period exceeded the yield, and opportunity cost, if rates rose and you were locked into a lower yield while newer issues paid more. The reasoning also encourages holding through a genuine change in circumstances rather than accepting a small mark-to-market loss and redeploying. This became a very expensive lesson for institutions that held long positions to maturity on exactly this logic while their funding costs rose.
The borderHold-to-maturity is a sound plan when the maturity matches a real liability and the holding is short enough that inflation surprises are contained. It is not a defence against a rate move — it merely relocates the loss from the price of the asset to the yield you failed to earn.
We give no yields and no tax figures, so every comparison we recommend must be completed with current data you gather elsewhere. The tax advantages discussed are also specific to one country's structure and are meaningless or reversed for readers elsewhere — and for a foreign holder the currency exposure we flag briefly is frequently the dominant term, deserving more space than we give it. Our general preference for simplicity over optimisation also means we probably under-serve readers with genuinely large cash positions, for whom the direct-ladder complexity we discourage is well worth the effort.
Frequently asked questions
When is the interest taxed?
At maturity, when the discount is realised — not ratably over the holding period for bills of one year or less. A bill bought in November maturing in February therefore creates taxable income in the second year, which is occasionally useful for shifting income across tax years.
Do I need to file anything unusual?
No. You receive an interest statement and report it as interest income, then claim the state exemption according to your jurisdiction's rules. Brokerage-held bills appear on your consolidated statement, which is why many people prefer that route.
Are T-bills better than I bonds?
They solve different problems. T-bills lock a known nominal yield for a short period; inflation-linked bonds protect purchasing power over longer holds with different rules and limits. See TIPS and I bonds for that comparison.
Is there any real risk?
Credit risk is as close to zero as exists in finance. The genuine risks are reinvestment risk — rates may be lower when your bill matures — and price risk if you sell early. Neither affects a held-to-maturity ladder sized to your actual needs.
The bottom line
Convert the quoted discount rate to a bond-equivalent yield, then run the after-tax comparison against your best savings or CD rate. In a high-tax state the exemption usually wins by enough to justify the small extra effort; in a no-income-tax state it often does not. Match terms to when you need the money, hold to maturity, and let auto-reinvestment do the rest.
Revision log. Jul 2026: added the yield conversion and after-tax comparison model, plus the purchase route comparison. Reviewed twice yearly.