Treasury Bill

What Is a Treasury Bill?

Treasury Bills (T-bills) are short-term US government debt obligations issued with maturities of 4, 8, 13, 17, 26, or 52 weeks. Unlike Treasury notes and bonds that pay semi-annual coupons, T-bills are issued at a discount to their face (par) value and mature at par — the difference is the investor's return.

Example: A 26-week $1,000 T-bill priced at $975 yields approximately 5.1% annualised.

T-Bills as the Risk-Free Rate

T-bills are universally treated as the "risk-free rate" in finance because they combine:

• Zero default risk: Backed by the full faith and credit of the US government
• Zero duration risk: Maturities of less than one year minimise interest rate sensitivity
• Maximum liquidity: The most liquid securities market in the world

The 3-month T-bill yield is the standard proxy for the risk-free rate in asset pricing models (CAPM, Sharpe ratio calculations).

T-Bill Market Structure

T-bills are auctioned weekly by the US Treasury. The 3-month bill auction is a critical event because it sets the tone for short-term money markets. Foreign central banks, money market funds, banks, and corporations are the largest buyers.

The 2023 T-Bill Supply Surge

After the debt ceiling resolution in June 2023, the Treasury issued ~$1 trillion of T-bills within months to rebuild the TGA. This massive supply:

1. Attracted money market funds, draining the Fed's RRP facility
2. As RRP declined, further T-bill buying started hitting bank reserves — tightening conditions
3. T-bill yields approached and briefly exceeded 5.5% — higher than many money market accounts, triggering broad retail interest

What to Watch

• 3-month T-bill vs Fed funds rate: Spread signals stress or disfunction in short-term funding
• T-bill auction demand (bid-to-cover ratio): Low demand signals investors demand higher yields for short-term government debt
• TGA level: Signals upcoming T-bill issuance