Treasury bills – better known as T-bills – are debt securities issued by the United States Treasury with maturities of one year or less.
They are considered risk-free, as the government can always print the money to pay back the debt.
And given that they have only a short time to maturity, they have very little sensitivity to interest rate moves. If interest rates rise, the bonds don’t fall much in value.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For the first time in the investment lives of many Americans, T-bills have been offering a competitive yield.
At the time of writing, T-bills offer yields at an annualized 4%-plus depending on the specific time to maturity.
You may be one of those Americans buying T-bills for the first time.
So let’s walk through the process of what happens when your T-bill matures and what your options are.
How do Treasury bills work?
True T-bills generally do not make interest payments (called “coupon payments” in bond parlance). Instead, you buy them at a discount.
In a hypothetical example, you might pay $950 today for a T-bill that will mature at $1,000, netting you a risk-free profit of $50.
You can also buy longer-term Treasury notes that are close to maturity and get the same effect.
For example, a 10-year Treasury note that is already nine years old and has one year remaining will have the same basic characteristics, though a portion of your return will come from semiannual coupon payments.
When your T-bill matures, its life is over. The U.S. government will pay you the full face value of the bond.
In our example above, you’d simply see the bond disappear out of your brokerage account or IRA and be replaced with $1,000.
What do you do after a Treasury bill matures?
T-bills might be risk-free in terms of credit risk and virtually risk-free in terms of interest rate risk, but they do present the “high-quality” problem of reinvestment risk.
Reinvestment risk is the possibility that your investment options might not be as attractive when your bill matures and you have the fresh cash to deploy.
Today, T-bills pay a little under 4.5%. In six months, it’s entirely possible yields will be significantly lower than that.
Reinvestment risk should be a factor you take into consideration when choosing what specific security to buy.
Today, four-week T-bills offer a yield of 4.31%. But a T-bill with a year to maturity yields about 3.98%.
Do you chase that higher yield on the shorter-term bill knowing that you might have to reinvest the proceeds when it matures at a lower rate?
Or do you lock in a slightly lower yield to eliminate that risk?
"The best solution for minimizing reinvestment risk is simply to split the difference and ladder your fixed income portfolio," said Douglas Robinson, a bond trader and principal of RCM Robinson Capital Management LLC in Mill Valley, California.
"As a practical matter,' Robinson notes, "this would mean dividing your investment in T-bills into several smaller investments, each maturing on a different date."
If you’re investing a modest amount, laddering might not be super practical.
But if you have a large chunk of your net worth invested in T-bills, laddering can be a good way to guarantee a decent yield while also giving you the ability to quickly reinvest as opportunities present themselves.
Related content
-
How Digital Platforms Are Changing the Way You Invest in GoldInvesting in gold is easier than ever thanks to digital platforms. Learn how online tools are lowering costs, increasing transparency and making gold accessible to all investors.
-
Stocks Rise to Start Fed Week: Stock Market TodayThe Nasdaq Composite and S&P 500 hit new record closing highs as Wall Street awaits the Fed's next rate cut.
-
How Digital Platforms Are Changing the Way You Invest in Gold
Investing in gold is easier than ever thanks to digital platforms. Learn how online tools are lowering costs, increasing transparency and making gold accessible to all investors.
-
Stocks Rise to Start Fed Week: Stock Market Today
The Nasdaq Composite and S&P 500 hit new record closing highs as Wall Street awaits the Fed's next rate cut.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams NowBeyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
