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Treasury Bills vs. Bonds: Which Is Best For Me in 2023?

Treasury Bills vs. Bonds
Treasury Bills vs. Bonds

Fixed-income securities play an important role within individual investment portfolios and the economy at large. But like other securities, fixed-income instruments come in a myriad of variations, from short-term Treasury bills that only pay interest when the bill matures, to long-term Treasury bonds, whose investors receive interest twice yearly. Below, we’ll specifically examine the similarities and differences between Treasury bills, Treasury bonds and other types of bonds. If you’re interested in investing in fixed-income securities, a financial advisor can help you build a balanced portfolio.

Treasury Bills vs. Treasury Bonds

Like their name suggests, Treasury bills and Treasury bonds are debt instruments issued by the U.S. Department of the Treasury to help fund the operations of the federal government. Since they are backed by the “full faith and credit” of the government, both are extremely low-risk investments known for their relative safety. However, that security comes at a cost for investors. The returns offered by “T-bills” and “T-bonds” often fall well short of the returns of stocks and mutual funds.

The key difference between the two is the amount of time it takes for each to mature. While Treasury bonds are considered long-term debt securities, maturing 30 years after they are sold, Treasury bills are short-term securities that mature within a year and pay less interest than T-bonds. In fact, the maturity period of T-bills can be as short as four weeks.

The other primary difference between T-bills and T-bonds is how interest is paid. A T-bill pays out interest only when it matures. When an investor purchases a T-bill, they’ll pay a discounted rate and later collect the full face value of the bill when it reaches maturity.  Treasury bonds work differently, paying out interest to investors twice a year until reaching maturity.

But T-bills and T-bonds share a plethora of similarities. Both are initially purchased at auction, either on the TreasuryDirect platform or through a bank or broker. Both can also be bought and sold on secondary markets. The minimum purchase of either kind of security is $100 and both are sold in increments of $100.

Treasury Bills vs. Savings Bonds

Treasury Bills vs. Bonds
Treasury Bills vs. Bonds

Another common type of bond is the U.S. savings bond. Like T-bills and T-bonds, savings bonds are issued by the Treasury Department to help fund government operations, making them reliable but not lucrative investments. However, unlike T-bills and T-bonds, savings bonds cannot be bought and sold on secondary markets. A savings bond can also be purchased with as little as $25.

The two most common varieties of savings bonds are Series I and Series EE bonds. Interest accrues monthly and compounds semiannually for both kinds of savings bonds. Like T-bills, you collect your interest when the bond matures. While Series EE bonds are sold at a discount (half face value) and earn interest for 30 years, they double in value after 20 years. Series I bonds also earn interest (fixed interest and inflation-adjusted interest) for 30 years.

Government-backed Debt Securities Type of Security Maturity Period When Interest is Paid Minimum Treasury bill 4, 8, 13, 26 or 52 weeks At maturity $100 Treasury bond 30 years Every 6 months $100 Series EE savings bond 30 years Earned monthly, compounded semiannually $25 Series I savings bond 30 years Earned monthly, compounded semiannually $25 electronic/$50 paper Other Types of Bonds

Not all bonds are sold by the federal government. Municipal bonds are issued by local governments to raise money for projects like new roads and schools. Municipal bonds offer a fixed rate of return, with interest paid out every six months like Treasury bonds. However, municipal bonds aren’t as safe as T-bills or T-bonds, since local governments can default and go bankrupt.

Like governments, corporations also look to bonds as a means to raise capital. Corporate bonds can pay out interest at fixed or variable rates, or exclusively on their final maturity date. Unlike the federal government, corporations must work with investment banks or other financial institutions to get their bonds onto primary or secondary markets.

Bottom Line

Treasury bills are short-term debt securities issued by the federal government that mature within a year of purchase. Bonds, on the other hand, come in a number of variations and typically come with much longer maturity periods. Fixed-income securities issued by the federal government are viewed as ultra-safe investments, but they won’t produce significant returns. Investors can also purchase bonds issued by municipal governments and corporate entities.

Asset Allocation Tips

Treasury Bills vs. Bonds
Treasury Bills vs. Bonds
  • A financial advisor can also help you spread your assets across various investment classes. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • The Rule of 110 is a rule of thumb that can help direct how much of your retirement savings is allocated to equities versus bonds. Simply subtract your age from 110 to determine the percentage of your portfolio that should be allocated to equities, with the remaining portion invested in bonds. For instance, a 50-year-old following this rule would have a 60-40 split between stocks and bonds.

  • Need more help determining the right asset allocation? Give SmartAsset’s free asset allocation calculator a try. This will tell you how much of your portfolio should be allocated to various investments. This is determined by looking at your risk tolerance.

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