Treasury Bill

Also known as: T-bill, Bubill, BOT

Government debt measured in weeks: the closest thing in finance to cash that pays interest.

3 min read · 558 words · Updated

1 · SnapshotThe one idea to remember
Key intuition: the T-bill rate is the economy's baseline number — the return for taking essentially no risk for a short time. Every other investment must argue why it beats it.
2 · BeginnerWhat is it, really?

A Treasury bill is government borrowing at its shortest and simplest: a promise to pay a fixed amount on a date a few weeks to a year away, sold today at a discount. No coupons — buy at 98.8, receive 100, the 1.2 difference is your interest.

Bills sit at the very center of the financial system's idea of "safe": default risk negligible, price risk tiny (maturities are so short that rate moves barely dent them), and liquidity so deep that an institutional-sized holding converts to cash in minutes. When investors say they're "in cash", they usually mean this.

Governments run weekly auctions; money-market funds, corporations parking payroll, banks and foreign central banks are the standing buyers.

Asset class
Money markets
Instrument type
Short-term discount security
Traded
Auction + deep secondary market
Typical users
Money funds, corporates, central banks

Which risks decide the outcome

Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.

  • Marketdecides it
  • Creditmatters
  • Liquiditybarely applies
  • Fundingbarely applies
  • Operationalbarely applies

What decides it here. The smallest set of risks on this site, and even here something decides it: a rise in short rates reduces the value of the bill you already hold. Held to maturity in its own currency, almost nothing does.

What the five mean, and which one decides where →

3 · IntermediateHow it works in practice

Quoting conventions (the archaic corner)

  • Discount rate: US bills quote at a "discount yield" — the discount as % of face, on a 360-day year: \(d = \frac{100-P}{100}\cdot\frac{360}{n}\). It understates the true return.
  • Bond-equivalent yield converts to a comparable investment yield on price paid and 365 days.

Auctions

Sold via single-price auctions: competitive bidders state yields; everyone pays the market-clearing ("stop-out") level. Bid-to-cover ratios and the tail (gap between average and stop-out) are watched as demand health checks.

Bills in the plumbing

  • Collateral: the premier collateral in repo and derivatives margining.
  • Supply swings matter: debt-ceiling episodes crush bill supply then flood it, pushing short rates around; money funds swing between bills and the Fed's RRP facility accordingly.
  • The 3-month bill is a benchmark for "the" risk-free rate in countless models — and one leg of the famous yield-curve recession indicator (3m vs 10y).
Worked example: a 26-week bill auctions at 97.90. Discount yield = (2.10/100)×(360/182) ≈ 4.15%; your actual return = 2.10/97.90 over 182 days ≈ 4.30% annualised (365-day). Same bill, three "rates" — conventions matter.
4 · AdvancedPricing & valuation

Pricing

A bill is the purest zero-coupon instrument: \(P = 100 \cdot e^{-z(T)\,T}\) — bills define the front of the risk-free curve. Their yields decompose as expected policy rates over the horizon plus (tiny) term premium plus a convenience yield: bills persistently yield below comparable OIS because their moneyness (collateral value, regulatory status) is worth basis points. That spread — bills-OIS — is a live indicator of safe-asset scarcity.

The zero lower bound curiosity

Bills have traded at negative yields (Europe for years; US briefly) — buyers paying for safety and balance-sheet-friendly parking, an empirical measure of the convenience yield's size.

Bills vs. the alternatives

$$ y_{bill} \approx \bar{r}^{OIS}_{[0,T]} - cy + \varepsilon_{supply} $$
What the symbols mean
  • ythe yield to maturity
  • rthe interest rate, per year
  • Sthe price of the underlying today
  • Tmaturity, in years
  • cthe coupon rate

Money funds arbitrage bills against repo and the RRP; corporates against commercial paper and deposits. Supply shocks (post-debt-ceiling issuance floods) temporarily push \(\varepsilon\) positive — measurable, tradable, and a favorite natural experiment for money-market researchers.

Risk notes

Price risk is small but nonzero (a 1-year bill has duration ~1: a 100bp shock costs ~1%); the real institutional risks are settlement/operational and — as the 2023 debt-ceiling brinkmanship reminded everyone — the technical-default tail on specific maturity dates, visible as kinks in the bill curve around "X-dates".

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.

5 · Desk notesHow practitioners think about it
Practitioner note: the bill curve is the market's cleanest reading of near-term policy plus safe-asset scarcity. When bills trade rich to OIS, someone, somewhere, badly needs pristine collateral.

Now say it back

Close the page and give Treasury Bill in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.

  1. Who wants what — two parties wanted opposite things badly enough to write it down.
  2. What the contract obliges, and when — not the payoff; the obligation.
  3. Where the money comes from — name the source, or you have described a hope.
  4. What makes it lose — the ordinary way, not the dramatic one.

Do it with a clock → · why these four

Put Treasury Bill beside any other instrument →

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Repo

Sell a bond today, buy it back tomorrow: the secured loan that finances the entire bond market.
Medium. Money MarketsCP · ABCP

Commercial Paper

Corporate IOUs measured in days — how blue-chip companies borrow between bond issues and bank lines.
Easy. Money MarketsCD · Time deposit

Certificate of Deposit

A deposit with a term and a rate — the same instrument at the savings branch and on a bank funding desk.

Where this instrument shows up elsewhere

Information and education only. Every page, figure and calculator on this site exists to explain how financial instruments work. Nothing here is investment, tax or legal advice, a recommendation, or a valuation you can rely on. Full disclaimer