Treasury Bond vs. Bill

Deciding where to invest your money is no easy task. Market fluctuations and changing economic conditions throw a lot of uncertainty into investment portfolios. If the idea of taking on a lot of risk has you shaking in your boots, consider putting your money into government-backed debt securities. Two commonly traded securities are the Treasury bond and bill. So how do you know which makes a better investment: a Treasury bond vs. bill? 

What Are Treasury Bonds?

A Treasury bond is a government-backed debt security issued by the U.S. Federal government. Commonly referred to as T-Bonds, the money that is raised finances government organization spending. These Treasury securities are considered relatively risk-free because they are backed by the full faith and credit of the U.S. government. When necessary, the U.S. government could increase revenues, such as raising taxes, to ensure repayment.

Treasury bonds have maturities of 20 or 30 years and pay a fixed interest rate every six months. Interest rates on T-Bonds are lower since they are deemed safe investments. While you can expect a steady income stream until the bond matures, what you earn may be less than higher risk investments.  

Pros

To determine whether Treasury bonds are the right fit for you, consider their advantages.

• Safe, risk-free investments: Backed by the U.S. government, Treasury bonds are considered to be safe-haven investments
• Regular income stream: You receive a predictable interest payment every six months
• Liquid: This investment should be fairly easy to buy or sell because the Treasury bond market is vast with many players
• Low fees: Many brokerages don’t charge fees to trade Treasury bonds 
• Tax advantages: You pay no state or local tax on earnings

Cons

Like any investment, Treasury bonds have drawbacks, although those are minor.

• Longer maturity: Holding on to a longer-term investment can lock up your funds
• Lower returns: Lower risk means lower returns than what you might find with another investment
• Inflation risk: Rising inflation can eat into your investment’s value
• Interest rate risk: Fluctuating interest rates could affect what you earn. You also run the risk of having to re-invest maturing funds at a lower interest rate.

What Are Treasury Bills?

Treasury bills, or T-Bills, are short-term bonds issued by the U.S. government. These short-term bonds mature between four weeks to one year. T-Bills are also safe investments that the U.S. government backs.

T-Bills are zero-coupon bonds, so they don’t pay a fixed interest rate. Instead, you buy them at a discount and receive the total face value when they mature.

For example, assume you paid $98 for a T-Bill with a face value of $100 and a four-week term. Once it matures, you receive $100, which means you earned $2 on the investment.  

Pros

Investing in Treasury bills has several advantages:

• Low risk: There is little risk your investment will lose value since the U.S. government backs it.
• Lower minimum trades: Compared with other short-term investments, you may be able to invest with lower minimums. The lowest denomination of T-Bills is $100.
• Several maturity dates: The bills auctioned are available across six maturities: 4 weeks, 8 weeks, 13 weeks, 17 weeks, 26 weeks and 52 weeks, which provide a range of choices.
• Tax benefit: You don’t pay state or local tax paid on earnings.

Cons

Despite the advantages of Treasury bills, there are minor drawbacks to consider:

• Lower returns: Compared to other investments that are slightly higher risk like corporate bonds, Treasury bills offer lower returns. 
• Inflation risk: Treasury bills might be less attractive in an inflationary environment where the fixed returns become worth less.
• Re-investment risk: As short-term Treasury bills expire, you need to re-invest the face value and interest to earn a return. If interest rates are lower, those funds could be re-invested at a lower interest rate.

Comparing Treasury Bonds and Bills

Choosing between Treasury bonds and bills often depends on your investment goals and how long you want your money tied up. 

Maturity Period

The maturity period refers to the expiration of the bond or bill. Treasury bonds are long-term investments that mature between 20 and 30 years. In contrast, Treasury bills have shorter maturities, which range from four weeks to one year. 

Interest Rates

Treasury bills are known as zero-coupon bonds. They don’t make interest payments; instead, you receive the difference between the face value and what you paid when the T-Bill matures. 

Treasury bonds pay a fixed amount of interest, known as a coupon payment, every six months. Since Treasury bonds mature between 20 and 30 years, the interest paid is typically higher than what you’ll earn on a Treasury bill. 

Pricing Mechanisms

With Treasury bonds, you pay face value and receive a set interest rate when purchasing a Treasury bond. Until the bond reaches maturity, you receive semi-annual interest payments. Once the bond matures, you get the original face value paid back. The price may be the face value, also known as the par value, or less and depends on the yield to maturity and the interest rate. Yield to maturity represents the annual return.

Treasury bills are sold at par value or a discount. The discount rate off the face value determines the price. Upon maturity, you receive the total face value of the Treasury bill. Both Treasury bonds and bills can be purchased directly from the U.S. government through its TreasuryDirect site. 

Risk Factors

Both Treasury bonds and bills have minimal risk since the U.S. government backs them. Since the government could raise taxes or increase revenue if they need money to repay outstanding bonds or bills, Treasury bonds and bills are considered to be risk-free.

However, the longer the maturity, the more opportunity cost there is if you could have invested your money elsewhere with a better return. 

Investment Goals

Choosing between Treasury bonds and bills often comes down to your investment goals. Treasury bonds can be a good fit for long-term investing. These low-risk bonds pay a fixed income until the bond matures.    

When your investment strategy has a shorter term, investing in Treasury bills may be a better fit. You can invest in Treasury bills with maturities of up to one year. You may earn more on your money than if you kept it in a savings account.

Treasury Bond vs. Bill vs. Note

Treasury bonds, bills and notes share many similarities. All three are Treasury securities issued by the U.S. government. Since the U.S. government backs them, they are considered zero-risk securities, so you don’t have to worry about getting your money back when you invest.

However, Treasury bonds, bills and notes have different maturity dates. Treasury bonds mature between 20 and 30 years, whereas Treasury bills have shorter maturity rates of four weeks to one year. A Treasury note matures between two and ten years.

Both Treasury bonds and Treasury notes pay interest every six months. A Treasury bill doesn’t pay interest. Instead, you pay a discount when you buy a Treasury bill. The difference between the face value of the Treasury bill and what you paid for it is how much you earn. 

Worry-Free Investing with Treasury Bonds and Bills

Treasury bonds and bills offer a safe way to invest your money. Just consider what your overall investment strategy is before you take the plunge. While you may get better returns with other investments, Treasury bonds and bills come with the full backing of the U.S. government. You don't have to worry about losing money. 

Frequently Asked Questions