What Happens When a Treasury Bill Matures?
Maximize interest rates with these strategies for when a Treasury bill matures.
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 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.
T-bills have been offering a competitive yield in recent times. At the time of writing, T-bills offer yields at around an annualized 4%, depending on the specific time to maturity.
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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.
What do you do after a Treasury bill matures?
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 from your brokerage account or IRA and be replaced with $1,000 in liquid funds.
If it's in, say, your brokerage account, you can now take the $1,000 and do what you want with it. Maybe you want to use it now to pay for something, or maybe you want to reinvest it, either in more T-bills, savings accounts or the stock market. The money is yours to do as you will.
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, which is the possibility that your investment options might not be as attractive when your bill matures and you have fresh cash to deploy.
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%. But a T-bill with a year to maturity yields almost 4.5%. You can lock in that higher yield on the longer-term bill, but there's no saying what you'll find in rates a year from now.
"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.
What's your next move when your T-bill matures?
Whether you're reinvesting your money, building a T-bill ladder or considering other investments, a financial adviser can help you evaluate your options. Get guidance on balancing competitive yields, liquidity and your long-term financial goals.
Use the tool below to connect with a vetted financial professional today:
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