Treasury Bills vs. Bonds: What's the Difference? - SmartAsset (2024)

Treasury Bills vs. Bonds: What's the Difference? - SmartAsset (1)

Fixed-income securities play an important role within individual investment portfolios and the economy at large. But like other securities, fixed-income instruments come in a myriad of variations, from short-term Treasury bills that only pay interest when the bill matures, to long-term Treasury bonds, whose investors receive interest twice yearly. Below, we’ll specifically examine the similarities and differences between Treasury bills, Treasury bonds and other types of bonds. If you’re interested in investing in fixed-income securities, a financial advisor can help you build a balanced portfolio.

Treasury Bills vs. Treasury Bonds

Like their name suggests, Treasury bills and Treasury bonds are debt instruments issued by the U.S. Department of the Treasury to help fund the operations of the federal government. Since they are backed by the “full faith and credit” of the government, both are extremely low-risk investments known for their relative safety. However, that security comes at a cost for investors. The returns offered by “T-bills” and “T-bonds” often fall well short of the returns of stocks and mutual funds.

The key difference between the two is the amount of time it takes for each to mature. While Treasury bonds are considered long-term debt securities, maturing 30 years after they are sold, Treasury bills are short-term securities that mature within a year and pay less interest than T-bonds. In fact, the maturity period of T-bills can be as short as four weeks.

The other primary difference between T-bills and T-bonds is how interest is paid. A T-bill pays out interest only when it matures. When an investor purchases a T-bill, they’ll pay a discounted rate and later collect the full face value of the bill when it reaches maturity. Treasury bonds work differently, paying out interest to investors twice a year until reaching maturity.

But T-bills and T-bonds share a plethora of similarities. Both are initially purchased at auction, either on the TreasuryDirect platform or through a bank or broker. Both can also be bought and sold on secondary markets. The minimum purchase of either kind of security is $100 and both are sold in increments of $100.

Treasury Bills vs. Savings Bonds

Another common type of bond is the U.S. savings bond. Like T-bills and T-bonds, savings bonds are issued by the Treasury Department to help fund government operations, making them reliable but not lucrative investments. However, unlike T-bills and T-bonds, savings bonds cannot be bought and sold on secondary markets. A savings bond can also be purchased with as little as $25.

The two most common varieties of savings bonds are Series I and Series EE bonds. Interest accrues monthly and compounds semiannually for both kinds of savings bonds. Like T-bills, you collect your interest when the bond matures. While Series EE bonds are sold at a discount (half face value) and earn interest for 30 years, they double in value after 20 years. Series I bonds also earn interest (fixed interest and inflation-adjusted interest) for 30 years.

Government-backed Debt Securities

Type of SecurityMaturity PeriodWhen Interest is PaidMinimum
Treasury bill4, 8, 13, 26 or 52 weeksAt maturity$100
Treasury bond30 yearsEvery 6 months$100
Series EE savings bond30 yearsEarned monthly, compounded semiannually$25
Series I savings bond30 yearsEarned monthly, compounded semiannually$25 electronic/$50 paper

Other Types of Bonds

Not all bonds are sold by the federal government. Municipal bonds are issued by local governments to raise money for projects like new roads and schools. Municipal bonds offer a fixed rate of return, with interest paid out every six months like Treasury bonds. However, municipal bonds aren’t as safe as T-bills or T-bonds, since local governments can default and go bankrupt.

Like governments, corporations also look to bonds as a means to raise capital.Corporate bondscan pay out interest at fixed or variable rates, or exclusively on their final maturity date. Unlike the federal government, corporations must work with investment banks or other financial institutions to get their bonds onto primary or secondary markets.

Bottom Line

Treasury bills are short-term debt securities issued by the federal government that mature within a year of purchase. Bonds, on the other hand, come in a number of variations and typically come with much longer maturity periods. Fixed-income securities issued by the federal government are viewed as ultra-safe investments, but they won’t produce significant returns. Investors can also purchase bonds issued by municipal governments and corporate entities.

Asset Allocation Tips

Treasury Bills vs. Bonds: What's the Difference? - SmartAsset (3)
  • A financial advisor can also help you spread your assets across various investment classes.SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • The Rule of 110 is a rule of thumb that can help direct how much of your retirement savings is allocated to equities versus bonds. Simply subtract your age from 110 to determine the percentage of your portfolio that should be allocated to equities, with the remaining portion invested in bonds. For instance, a 50-year-old following this rule would have a 60-40 split between stocks and bonds.
  • Need more help determining the right asset allocation? Give SmartAsset’s free asset allocation calculator a try. This will tell you how much of your portfolio should be allocated to various investments. This is determined by looking at your risk tolerance.

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Treasury Bills vs. Bonds: What's the Difference? - SmartAsset (2024)

FAQs

Treasury Bills vs. Bonds: What's the Difference? - SmartAsset? ›

A T-bill pays out interest only when it matures. When an investor purchases a T-bill, they'll pay a discounted rate and later collect the full face value of the bill when it reaches maturity. Treasury bonds work differently, paying out interest to investors twice a year until reaching maturity.

What is the difference between a treasury bill and a bond? ›

Key takeaways

Treasury bills have short-term maturities and pay interest at maturity. Treasury notes have mid-range maturities and pay interest every 6 months. Treasury bonds have long maturities and pay interest every 6 months.

What is the downside to buying Treasury bonds? ›

These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.

Are Treasury bills more risky than Treasury bonds? ›

If you're looking for a short-term investment with low risk, Treasury bills are a great choice. However, if you're looking for a longer-term investment that yields semiannual income with a consistent interest rate, buying Treasury bonds is likely the better choice.

What is the disadvantage of investing in Treasury bills? ›

This means that investors looking for high returns may not find T-bills attractive. Since T-bills have fixed interest rates, inflation can erode the purchasing power of the returns earned from these investments. This means that investors may need help to keep up with inflation, resulting in a decline in real returns.

What happens when a T-bill matures? ›

When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

Are Treasury bills tax free? ›

Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax, but is exempt from all state and local income taxes.

Do Treasury bonds ever lose value? ›

If a bond is held past its maturity, the federal government remains responsible for the debt. However, savings bonds that are held past their maturity date do not continue to earn interest and may actually lose value due to inflation.

What are 1 year Treasury bills paying? ›

1 Year Treasury Rate (I:1YTCMR)

1 Year Treasury Rate is at 5.21%, compared to 5.20% the previous market day and 5.24% last year. This is higher than the long term average of 2.95%. The 1 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 1 year.

How do you avoid tax on Treasury bonds? ›

The Treasury gives you two options:
  1. Report interest each year and pay taxes on it annually.
  2. Defer reporting interest until you redeem the bonds or give up ownership of the bond and it's reissued or the bond is no longer earning interest because it's matured.
Dec 12, 2023

Why people don t invest in Treasury bill? ›

Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.

Are Treasury bills better than CDs? ›

Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.

Do you pay capital gains on Treasury bills? ›

Conclusion. The interest income earned on Treasury bills is taxable at the federal level, and earnings from Treasury bills sold on the secondary market can be taxed via capital gains taxes.

Can you lose principal on treasury bills? ›

The No. 1 advantage that T-bills offer relative to other investments is the fact that there's virtually zero risk that you'll lose your initial investment. The government backs these securities so there's much less need to worry that you could lose money in the deal compared to other investments.

Why then does anyone invest in Treasury bills? ›

A Treasury bill, or T-bill, is a short-term debt obligation backed by the U.S. Treasury Department. It's one of the safest places you can save your cash, as it's backed by the full faith and credit of the government. T-bills are auctioned off at a discount and then redeemed at maturity for the full amount.

How do treasury bills work for dummies? ›

Treasury bills, or bills, are typically issued at a discount from the par amount (also called face value). For example, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86 ($1,000 x . 99986111 = $999.86111). * When the bill matures, you would be paid its face value, $1,000.

Are T-bills still a good investment? ›

Are Treasury bills a good investment? Ultimately, whether Treasury bills are a good fit for your portfolio depends on your risk tolerance, time horizon and financial goals. T-bills are known to be low-risk short-term investments when held to maturity since the U.S. government guarantees them.

What is the 6 month Treasury bill rate today? ›

6 Month Treasury Bill Rate is at 5.17%, compared to 5.18% the previous market day and 5.29% last year.

What is the 1 year T bill rate? ›

1 Year Treasury Rate is at 5.22%, compared to 5.21% the previous market day and 5.22% last year. This is higher than the long term average of 2.95%. The 1 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 1 year.

What is the 3 month Treasury bill rate? ›

3 Month Treasury Bill Rate (I:3MTBRNK)

3 Month Treasury Bill Rate is at 5.26%, compared to 5.26% the previous market day and 5.16% last year.

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