Which is better Treasury bills or bonds?
Compared with
Cons: Interest Rate Risk: Long-term treasuries are more sensitive to changes in interest rates than short-term ones. If interest rates rise, the value of existing long-term bonds may decline, leading to potential capital losses.
While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.
The Bottom Line. Both Treasury bonds and Treasury bills are low-risk debt securities issued by the federal government. T-bonds are designed for long-term investing, while T-bills have much shorter maturity periods. Both can help diversify your investment portfolio while shielding you from state and local taxes.
- T-bills offer low returns compared with other debt instruments.
- The T-bill pays no interest payments leading up to its maturity.
- T-bills can inhibit cash flow for investors who require steady income.
- T-bills have interest rate risk, so, their rate could become less attractive in a rising-rate environment.
Currently, Treasuries maturing in less than a year yield about the same as a CD. Therefore, all things considered, it likely makes more sense to choose Treasuries over CDs, depending on your situation, because of the tax benefits and liquidity when considering very short-term maturities.
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
Basic Info
1 Year Treasury Rate is at 5.00%, compared to 5.03% the previous market day and 5.02% last year.
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.
Why not to buy Treasury bills?
Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.
Investors Near or in Retirement
A portfolio that includes Treasury bonds, bills, or notes, provides safety and helps to preserve their savings since Treasuries are considered risk-free investments. With their consistent interest payments, T-bonds can offer an ideal income stream after the employment paychecks cease.
Treasury bills, or bills, are typically issued at a discount from the par amount (also called face value). For example, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86 ($1,000 x . 99986111 = $999.86111).
Are Treasury bills taxed as capital gains? Normally no. However, if you buy a T-bill in the secondary market and then achieve a profit, you may be liable for capital gains depending on your exact purchase price.
Key Takeaways
Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT. Investors can opt to have up to 50% of their Treasury bills' interest earnings automatically withheld.
Investors who hold T-bills can rest assured that they will not lose their investment. T-Bills are considered a zero-risk investment thanks also to Treasury market liquidity.
The only interest payment to you occurs when your bill matures. At that time, you are paid the par amount (also called face value) of the bill.
Use the Education Exclusion. With that in mind, you have one option for avoiding taxes on savings bonds: the education exclusion. You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs.
When you buy T-bills through your bank, it may charge you additional fees and expenses such as sales commissions or transaction charges. These extra costs can add up over time and eat into your returns on your investment.
In every case where we've compared purchasing Treasuries vs. CDs, Treasuries have been the better option. An investor would be better off rolling over 6-month Treasuries yielding ~5.4% than buying a 5-year CD yielding 5.4% that becomes callable starting in 6 months.
Do you pay taxes on Treasury bonds?
Interest from corporate bonds and U.S. Treasury bonds interest is typically taxable at the federal level. U.S. Treasuries are exempt from state and local income taxes. Most interest income earned on municipal bonds is exempt from federal income taxes.
Treasury bonds are considered safer than corporate bonds—you're practically guaranteed not to lose money—but there are other potential risks to be aware of. These stable investments aren't known for their high returns. Gains can be further diminished by inflation and changing interest rates.
Even if the stock market crashes, you aren't likely to see your bond investments take large hits. However, businesses that have been hard hit by the crash may have a difficult time repaying their bonds.
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
An investor's risk tolerance levels also affect the price of a T-Bill. When the U.S. economy is going through an expansion and other debt securities are offering a higher return, T-Bills are less attractive and will, therefore, be priced lower.
