bills (T-bills) are debt obligations of the U.S. Government that mature
in one year or less. The U.S.
Treasury regularly sells bills with maturities of three months (13 weeks),
six months (26 weeks), and one year (52 weeks).
All bills are sold at discount so that the return to the investor
is the difference between the purchase price of the bill and its face
or par value.
volume of bills outstanding has grown substantially in recent years because
of the large federal budget deficits.
T-bills are the most popular money market instrument.
bills are held by a wide variety of investors, including individuals,
businesses, commercial banks, money market mutual funds, the Federal Reserve
System, and foreigners. The
popularity of T-bills stems from their unique characteristics.
First, T-bills are considered to be essentially free from default
risk. Second, they are highly
liquid because there is a very large and efficient secondary market that
enables investors to convert bills easily to cash.
Third, the income earned on T-bills is exempt from state and local
income taxes. And finally,
bills are sold in minimum denominations as small as $10,000 and in multiples
of $5,000, making them appropriate for the needs of both large and small
order to reduce the cost of issue of the large volume of bills that the
Treasury sells, T-bills are only issued on book-entry form.
Purchasers do not receive actual physical certificates.
Ownership is recorded in a book-entry account established at the
Treasury, and investors receive only a receipt as evidence of purchase.
The book-entry system for Treasury securities is a tiered custodial
system whereby the ownership of T-bills is represented by entries on the
books of a series of custodians.
This system extends from the Treasury itself through the Federal
Reserve banks and depository institutions to the ultimate owner.
weekly auctions of three- and six-month bills are held each Monday.
The amount of bills that the Treasury intends to sell at each weekly
auction is announced on Tuesday.
Bids must be presented at the Federal Reserve banks or their branches
investors may enter bids in two categories:
competitive and non-competitive.
Under a competitive bid, the bidders state the amount of bills
they are willing to purchase and the price they are willing to pay.
Competitive bids are usually made only by large investors.
Smaller investors may enter non-competitive bids.
Non-competitive bidders state the quantity of bills they are willing
to buy and agree to pay a price equal to the weighted average price of
bills sold to investors in the competitive bid category.
Non-competitive bids are limited to a maximum of $1 million of
each new offering.
Treasury fills all non-competitive bids first.
In recent years, the volume of non-competitive bids has averaged
between 10% and 25% of the issues sold.
The remainder of the issue after the non-competitive bids have
been filled is allocated to competitive bidders according to the price
of their bid, from the top bidder down.
wishing to buy bills other than at regular auction and those wishing to
sell bills prior to maturity may do so easily in the secondary market.
The secondary market in Treasury bills is the largest and most
efficient of any money market instrument.
One measure of its efficiency is the narrow spread between the
bid and ask prices on bills. This
spread is normally only between two and four basis points, that is only
$200 to $400 per $1 million traded.
secondary market in bills is maintained principally by a group of security
dealers known as primary dealers.
In 1986, there were 37 primary dealers, of which 14 were commercial
banks. In addition, there
is a large and growing number of secondary dealers.
in bills takes place "over the counter," rather than on a formal exchange.
Dealers are in almost constant contact over the telephone.
Primary dealers are in contact also with the Federal Reserve, and
the Fed conducts its open market operations in government securities only
through primary dealers.
have lower rates than other money market instruments such as certificates
of deposit (CDs) and commercial paper because investments in T-bills generally
are considered to be free from default risk.
The spread between the T-bill rate and that on other instruments
is not constant but varies over time and with economic conditions.
Over the past several decades, the spread between the CD rate and
that on T-bills has ranged from a high of more than 200 basis points to
less than 30. Commonly, the
spread tends to widen in bad economic time as investors tend to seek the
security of default-free T-bills and to narrow in good times as the market
becomes less concerned about default risk.
authority for Treasury bills is found in 31U.S.C. 3104, 3121.
Governing regulations include the following:
Department Circular No. 300, as revised (31 CFR, Part 306); Department
Circulars, Public Debt Series Nos. 26-76 (31 CFR, Part 350) and 27-76
(31 CFR, Part 349); and Department Circular, Public Debt Series No. 2-86
(31 CFR, Part 357) for bills issued in Treasury Direct.
For additional information, consult the Office of Financing, Bureau
of the public Debt.
T.Q. and ROWE, T.D., eds. "Treasury Bills," Instruments of the Money