Treasury bills, or T-bills, are one of the lowest-risk investment products available because they’re issued by the government. While the rate of return may not be very high, there’s zero chance that you’ll lose any money.
That said, even guaranteed investments come with pros and cons, which is why you need to understand how T-bills work before you decide if they fit into your financial plans.
What are T-bills in Canada?
When provincial and federal governments need to raise capital, they issue T-bills that the public can purchase. These debt securities are 100% guaranteed. Both your principal and interest are backed by the government, regardless of how much you invest.
You can purchase T-bills directly from most financial institutions and investment firms. In most cases, T-bills are issued in denominations starting at $1,000. That said, some mutual funds focus on fixed-income products, including T-bills, so it’s possible to invest at a lower cost of entry.
It’s best to think of T-bills as a form of fixed income since they’re fully guaranteed. They’re great for short-term investments or if you want to keep your money safe, but they provide little growth opportunity. For this reason, T-bills are often lumped together with bonds, term deposits and money market funds.
How do T-bills in Canada work?
Even though you get a guaranteed rate of return when purchasing T-bills, you’re not technically earning interest like you would with a guaranteed investment certificate. The yield you get is the difference between what you bought the T-bill for and what you sell it for when it matures.
Some new investors may be confused about how this works, but essentially, T-bills are sold at a discount. What that means is you buy T-bills at below their actual value. When you sell them back to the financial institution at the maturity date, they’ll be at “par value,” or their actual value. Since T-bills are worth more when you sell them, you’ll have made money.
For example, let’s say you bought a T-bill for $950. After one year, it matures and is worth $1,000. When you sell it, you’ll have made $50 on your investment. The capital gains made on T-bills are fully taxable if you hold them outside of a non-taxable account, such as your Tax-Free Savings Account (TFSA).
How T-bill yields work
As mentioned, the yield of T-bills is the difference between its value at the time you bought it compared to the time you sell it. This is known as the effective yield rate. However, if you decide to sell your T-bill early, you need to calculate how much interest you’ve earned while you held the T-bill. You can do this by using the following formula.
Purchase price × Effective yield rate × Number of days T-bill held ÷ Number of days in the year sold = Interest earned as income
Since T-bills are a form of fixed income, the overnight interest rate set by the Bank of Canada affects T-bill interest rates. Basically, when the Bank of Canada has a low prime rate, you should expect low yield rates from T-bills.
Pros and cons of T-bills in Canada
T-bills can be a good investment product for your portfolio. However, they still have some pros and cons that you’ll want to consider.
Pros of T-bills
- Guaranteed interest and principal
- Can sell at any time
- Available for purchase in non-taxable accounts
Cons of T-bills
- Low potential rate of return compared to equities
- Yields provided may not beat inflation
- Fully taxable when held in a taxable account
Treasury bills are a safe investment that provides you with some fixed income in your portfolio. You won’t get rich from them, but they will give you some security and can balance out other, riskier investments.
About the Author
Barry Choi
Barry Choi is a freelance personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and…
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FAQs
T-bills are issued with 3 month, 6 month, and 1 year maturities. T-bills are sold at a discount. This means that you buy T-bills for a price less than their par (face) value, and when they mature, the government pays you their par value. This is different than coupon bonds, which pay interest semi-annually.
What is the interest rate on Canada T-bill? ›
Canada 1 Year Treasury Bill Yield is at 4.44%, compared to 4.39% the previous market day and 5.09% last year. This is higher than the long term average of 4.27%.
How much does a $1000 T-bill cost? ›
A $1,000 26-week bill sells at auction for a discount rate of 0.145%. The formula shows that the bill sells for $999.27, giving you a discount of $0.73. When you get $1,000 after 26 weeks, you have earned $0.73 in "interest."
What are Treasury bills in simple terms? ›
A Treasury bill (T-bill) is a short-term debt obligation backed by the U.S. Department of the Treasury with a one-year maturity or less. Treasury bills are usually sold in denominations of $100 and can reach a maximum denomination of $10 million. T-bill rates depend on interest rate expectations.
What is the downside of T Bill? ›
The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.
Are T-bills taxed in Canada? ›
The capital gains made on T-bills are fully taxable if you hold them outside of a non-taxable account, such as your Tax-Free Savings Account (TFSA).
What is the Canadian equivalent of Treasury bills? ›
T-bills are government bonds; they're issued directly from the government of Canada. For this reason, T-bills are considered to be more secure than GICs. Also, the shorter maturity times allow you to reinvest if rates increase, whereas you could miss out on this with GICs' longer maturity rates.
What is the difference between a GIC and a T bill? ›
When you purchase treasury bills (T-bills) you lend money to the federal or provincial government for a set term but unlike GICs T-bills do not pay interest, they are purchased below what the government will give you at the end of the term.
Is interest on T-bills tax free? ›
Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax, but is exempt from all state and local income taxes.
Are Treasury bills better than CDs? ›
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
Savings accounts with 5% APY or higher
| Bank | APY | Min. deposit to open |
|---|
| EverBank | 5.05% | $0 |
| TAB Bank | 5.02% | $0 |
| CIT Bank | 5.00% (on balances of $5,000 or more) | $100 |
| DollarSavingsDirect | 5.00% | $0 |
12 more rowsAug 3, 2024
The minimum amount that you can purchase of any given Treasury Bill, Note, Bond, TIPS, or FRNs is $100. Additional amounts must be in multiples of $100. Do I have a choice as to where my Treasury securities are kept? All Treasury securities are issued in "book-entry" form – an entry in a central electronic ledger.
What happens to a T-bill when it matures? ›
Maturity of T-bills
On maturity, the principal amount will be credited to your respective account by the end of the day, typically after 6pm. For cash applications: The principal amount will be credited to your designated Direct Crediting Service bank account.
What day of the week should I buy Treasury bills? ›
Treasury Bills
Except for holidays or special circ*mstances, the offering is announced on Tuesday, the bills are auctioned on Thursday, and they are issued on the following Tuesday.
Is now a good time to invest in Treasury bills? ›
Right now, the 3-month Treasury bill rate is 5.25% while the 30-year Treasury rate is 4.58%. So, if you're looking for a risk-free way to earn interest on your cash over a short period of time, investing in a T-bill could be a good choice.
How do you profit from T-bills? ›
You buy bills at a discount — a price below par — and profit from the difference at the end of the term. The most common terms for T-bills are four, eight, 13, 17, 26 and 52 weeks. T-bills don't pay interest in the same way as other Treasurys.
How do bills work in Canada? ›
Approval by the Governor General or another designated representative of the Crown is required for a bill to become law once it has been passed by both Houses in identical form. Once a bill has been granted royal assent, it becomes law and comes into force on that day, unless the act provides otherwise.
What is the difference between a GIC and a Treasury bill? ›
When you purchase treasury bills (T-bills) you lend money to the federal or provincial government for a set term but unlike GICs T-bills do not pay interest, they are purchased below what the government will give you at the end of the term.
