What is the T-bill rate?

Treasury bills (T-bills) are short-term US government securities with maturities of 4, 8, 13, 17, 26, or 52 weeks. Unlike Treasury notes and bonds, which pay semiannual coupons, T-bills are sold at a discount to their face value and pay the full face value at maturity. The difference between the purchase price and face value represents the investor's return, expressed as the T-bill rate or yield.

T-bill rates are closely tied to the federal funds rate because both represent short-term, low-risk returns. When the Fed raises its target rate, T-bill yields rise almost immediately as investors demand higher returns for even the shortest-duration government debt. The 3-month T-bill rate is particularly important because the Federal Reserve Bank of New York uses it (along with the 10-year yield) to construct the Treasury yield curve that powers popular recession probability models.

Demand for T-bills comes from a broad base of investors: money market funds, corporate treasuries managing cash balances, foreign central banks seeking dollar liquidity, and individual investors looking for safe short-term parking for capital. The Treasury Department has dramatically increased T-bill issuance in recent years to fund the growing federal deficit, with the bill share of total marketable debt rising above historical norms. This surge in supply has kept T-bill rates competitive, sometimes exceeding other short-term rates.

For individual investors, T-bills offer several advantages. They are backed by the full faith and credit of the US government, making them virtually default-free. Their interest is exempt from state and local income taxes, giving them a tax advantage over bank savings accounts and CDs in high-tax states. With rates above 5% during 2023 and 2024, T-bills attracted unprecedented retail demand through TreasuryDirect.gov and brokerage platforms, as investors recognized they could earn equity-like returns with near-zero credit risk.