A Treasury bill is a direct obligation of the United States government with a maturity of one year or less. For a household holding idle balances, T-bills purchased directly through TreasuryDirect or through a brokerage often provide the highest yield with the lowest credit risk of any option available.
- 01Purchase a Treasury bill at auction through a brokerage or TreasuryDirect.
- 02Distinguish a T-bill from a T-note and a T-bond.
- 03Build a T-bill ladder for a household's cash reserve above the emergency floor.
The instrument
T-bills are sold at a discount to face value. A 4-week bill purchased at $997 that matures at $1,000 has an annualized yield determined by the discount and the days to maturity. They are auctioned weekly (4, 8, 13, 17 weeks) and less frequently for longer bills.
How to buy
Through a brokerage account: place a new-issue order at the next auction, no fee. Through TreasuryDirect: fund an account, place the order directly. Brokerage is simpler for most households and gives more flexibility to sell before maturity.
The ladder
A ladder is a set of T-bills maturing on a staggered schedule. A household holding $60,000 above its emergency reserve might buy $5,000 in 4-week bills every week, rolling maturities forward. The result is monthly liquidity, exposure to whatever the current short rate is, and no state income tax on the interest.
- T-bill interest is exempt from state and local income tax.
- Auctions weekly; brokerage is the simplest access.
- A ladder converts a lump sum into monthly liquidity.