Treasury Bills vs. Bonds: Which Should You Invest In? (2024)

The Federal Reserve began a series of aggressive interest rate hikes in 2022 to combat high inflation, creating a boon for investors looking for a place to safely grow their savings.

Treasurys are offering some of their highest yields since the 2000s. Before deciding whether or not to invest in them, it’s important to understand the difference between the various kinds. Treasury bills and Treasury bonds are two types of Treasurys that have been rising in popularity due to their backing by the U.S. government and strong interest rates that are outpacing inflation.

But which one is the better option for you? We've broken down the primary differences between Treasury bills and bonds to help you decide which should be in your portfolio.

Table of Contents

• What are Treasury bills?
• What are Treasury bonds?
• Differences between Treasury bills and bonds
• What to consider before investing in Treasury bills vs. bonds
• Treasury bills vs. bonds FAQs

What are Treasury bills?

Treasury bills, also known as T-bills, are short-term investments issued by the U.S. government. They can be purchased in increments of $100 up to $10 million, have maturities ranging from four weeks to one year and are sold at a discount to their face value. For example, a $1,000 Treasury bill that matures in one year may be sold for $950, with the investor receiving the full face value of $1,000 at maturity.

These types of securities are also called zero-coupon bonds because they don’t pay interest during the time between purchase and maturity. Instead, they’re sold at a discounted rate and repaid in full when they mature. The difference between the discounted rate and the full price at maturity is the same as the advertised interest rate for Treasury bills.

Treasury bills are considered one of the safest investments you can make since they are backed by the full credit of the U.S. government, which has never defaulted on its debts. Treasury bills can be purchased directly from the U.S. Department of the Treasury through auctions held on its TreasuryDirect website or through mutual funds, banks, secondary markets, brokerages or financial advisors.

There are two different types of Treasury bill auctions: competitive and noncompetitive. In a competitive auction, investors bid on the rate they’re willing to accept for the Treasury bill. Depending on the results of the auction, the investor will have their full order filled, only a portion filled or none of it filled. Competitive bidders are allowed to bid up to 35% of the initial offering amount.

In a non-competitive auction, investors commit to buying the Treasury bill at the rate created by the competitive auction, but their full order is always filled (up to $10 million per auction).

Pros and cons of investing in Treasury bills

What are Treasury bonds?

Like Treasury bills, Treasury bonds (T-bonds) are a type of debt security issued by the U.S. government, meaning they are backed by the full faith and credit of the federal government. However, unlike T-bills, Treasury bonds are longer-dated securities that mature in 20 or 30 years and pay a fixed rate of interest every six months until the date of maturity.

Treasury bonds are generally considered to be one of the safest fixed-income securities available and are often used by investors looking for a reliable source of income that hedges against inflation or produces retirement income.

Similarly to other government bonds, income from Treasury bonds is exempt from state and local taxes. Treasury bonds are sold via the same auction system as Treasury bills and are available at the same minimum and maximum investment amounts.

Pros of investing in Treasury bonds

• Low risk: Treasury bonds are some of the safest investments available due to their backing by the U.S. government.

• Tax advantages: Interest earned is exempt from state and local taxes.

• Long-term investment: Investors have the ability to lock in a fixed rate for up to 30 years.

• Steady income: Interest is paid semiannually, providing a reliable source of income.

• High liquidity: These assets can be easily bought and sold in the secondary market.

Cons of investing in Treasury bonds

• Low returns: Treasury bonds typically offer lower returns than other investments like stocks, ETFs or real estate.

• Inflation risk: They aren’t protected from inflation, so their value and purchasing power can erode over the long term.

• Poor diversification: T-bonds alone do not provide adequate diversification for a portfolio as they are highly correlated with other government securities.

• Auction system: TreasuryDirect’s auction system can be complicated and confusing for some investors.

• Interest rate risk: If the Fed raises interest rates, investors locked into long-term T-bonds aren’t able to take advantage.

Differences between Treasury bills and bonds

While the two types of securities are both issued and backed by the U.S. government, there are some key differences between Treasury bills and bonds. The following table outlines some of the main distinctions between the two.

Treasury notes

A third type of Treasury, called notes, are also available. Treasury notes, or T-notes, have terms of two, three, five, seven and 10 years. Like T-bills and T-bonds, they are available through both TreasuryDirect auctions and on secondary markets. Treasury bonds provide investors with the option of intermediate terms, compared to short-term Treasury bills or long-term Treasury bonds.

What to consider before investing in Treasury bills vs. bonds

When deciding which type of Treasury security to invest in, it’s important to consider your investment goals. If you’re looking for a short-term investment with low risk, Treasury bills are a great choice. However, if you’re looking for a longer-term investment that yields semiannual income with a consistent interest rate, buying Treasury bonds is likely the better choice.

Regardless of your decision, it’s important to consider the interest rate, liquidity and risk associated with each security option before making it part of your investment portfolio. The following are some of the most important factors to consider.

Investment horizon

One of the most important factors to consider when deciding whether to invest in bonds or buy Treasury bills is the length of time you’re willing to commit your money. Treasury bills have a maximum maturity of one year, while Treasury bonds can have maturities of 20 or 30 years. This is a significant difference in the amount of time your money is tied up in the investment.

In general, Treasury bills are viewed as a better choice if you want a short-term investment that enables you to either roll the funds back into Treasurys at the maturity date, or into other investments. On the other hand, Treasury bonds are more suitable for longer-term investments if you don't require large returns and are satisfied with the fixed rate.

Risk tolerance

The amount of risk you’re willing to take is another key factor in deciding between Treasury bills and bonds. With Treasury bills, you're only committing your money for no more than a year and as little as four weeks. With Treasury bonds, you’re committing funds to a much longer investment with a fixed rate of return. In one sense, this provides you with more stability since the returns are known ahead of time, but it also means your money is tied up longer.

Yield

Currently, Treasury bills have higher interest rates than bonds but also guarantee a return for a much shorter period. On the other hand, Treasury bonds will provide you with consistent interest income but are currently yielding less than Treasury bills. In terms of the secondary market, Treasurys may also be traded at a premium or discount depending on market conditions.

Liquidity

Treasury bills are highly liquid investments. While you can easily sell your Treasury bills at any time prior to maturity, you may have to wait until Treasury bonds reach maturity to receive your full return. This means that if you need access to cash quickly, Treasury bills may be a better option as they offer immediate liquidity.

Investment minimum

Both Treasury bills and Treasury bonds have a minimum investment of $100. This allows you to invest even if you don’t have a lot of capital available. In terms of maximum investment, both Treasury bills and bonds are limited to $10 million for non-competing bids and 35% of the total offering amount for competitive bids.