Understanding T-Bill Fever

T-bills are the shortest bonds in terms of maturity issued by the federal government. T-bills come in maturities ranging from just four weeks to under a year, with three- and six-month maturities being the most popular. Because of their short timelines, T-bills do not pay a semi-annual interest rate payment and are considered zero-coupon bonds. Investors buy T-bills at a discount to their par value/face value; at maturity, the Fed pays the investor the par value. The difference between the discount and par is essentially the ‘interest’ earned on the bond. Think of it this way: if you lend your friend $5 on Monday and on Friday they pay you $5.50 back, you have basically undergone a similar transaction to a T-bill.

Because of their short timelines, T-bills are considered the safest Treasury bond to own. After all, the chance of the U.S. defaulting is slim to none and the chances of that happening over the next four weeks or so is even lower. Historically, T-bills have functioned as a super-safe cash proxy for many investors.

The devil is in the details and that short-term maturity rate.

Because of the short-term maturity profile, T-bills will reflect the change in benchmark interest rates faster than longer-term bonds. An investor in a 10-year or 30-year bond technically needs to wait a decade or more before the bond matures and they get a higher rate. Not so with a three-month T-bill. They quickly mature and newly issued bills will reflect the higher interest rate.

With the Fed trying to fight inflation and the current surge in benchmark rates, T-bills are now reflecting that reality. Currently, investors can score a six-month T-bill at a 5% yield. That’s a rate not seen since 2007. A year ago, that yield was less than 1%.

A 5% yield for an ultra-safe investment is a tantalizing deal, particularly when other investments have been very volatile and recessionary risks are rising. And investors have acted accordingly. Billions of dollars have flowed into T-bills of various maturities over the last few months.

According to Refinitiv Lipper data, short-term U.S. Treasury bond funds saw their third-largest monthly inflows on record—over $10 billion—in February, while the number of accounts at TreasuryDirect with over $250K in assets that actively bought T-bills jumped to nearly 190,000. In the first week of March alone, more than $6 billion was added to the three largest ETFs tracking T-bills.

And speaking of ETFs, the number of new T-bill tracking ETFs in registration has jumped as well, with five new funds tracking T-bills and short duration bonds in registration. Currently a wide range of issuers have also announced plans to unveil new funds over the coming months.

Given that yields have hit levels not seen since before the Great Recession, it’s easy to understand why investors have gone ga-ga for T-bills. Strategists say that might not be a bad idea. With recessionary risk growing, it may be hard to beat the 5%+ return in these short-term bonds. That includes the broader stock market. For fixed income investors or retirees, that 5% yield goes a long way to helping reach safe withdrawal rates from a portfolio.

The question is how to buy them.

You can certainly buy them directly from the Treasury via TreasuryDirect. T-bills are sold in increments of $100 on the site and you can participate in auto-reinvestment of the security type. While TreasuryDirect is a tad cumbersome to use, it’s still a good deal for investors, especially those looking to add I-bonds to their mix.

Another way? Go for one of the T-bill focused ETFs. The trio of the iShares Short Treasury Bond ETF (SHV), the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL the iShares 0-3 Month Treasury Bond ETF (SGOV) offer exposure to the security type and various maturities. All three ETFs offer low costs, large trading volumes and yields ranging from 4.59% to 4.68%.

Finally, federal or Treasury-only money market funds could provide an answer. While they do own other securities, many tout T-bills as large holdings. Simply buying one of these could be enough to get exposure to the asset class.

All in all, T-bills have quickly gone from an afterthought to a main portfolio holding. That status may not be a bad thing. With yields rising and risks growing, the safe-haven bond could be a real winner this year.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.