Can Treasury Bills Actually Lose Value?

Treasury Bills (T-bills) are short-term debt instruments issued by the U.S. government. They are often perceived as a secure investment choice due to their backing by the full faith and credit of the U.S. government, which provides confidence regarding principal repayment. While generally considered safe, understanding their mechanics is important.

What Are Treasury Bills?

Treasury bills are short-term debt obligations issued by the U.S. Department of the Treasury. These instruments are characterized by their short maturities, typically ranging from a few days up to 52 weeks. Unlike other government securities, T-bills do not pay periodic interest payments during their term.

Instead, T-bills are issued at a discount from their face value. An investor’s return is realized at maturity, when the U.S. Treasury pays the full face value of the bill. The difference between the discounted purchase price and the face value received at maturity constitutes the interest earned by the investor.

How T-Bills Are Priced

T-bills are sold for less than their face value. For instance, an investor might purchase a $1,000 face value T-bill for $990, receiving the full $1,000 at maturity. The $10 difference represents the interest earned.

The market value of T-bills is influenced by prevailing interest rates. When market interest rates rise, the price of existing T-bills tends to fall to offer a competitive yield compared to newly issued securities. Conversely, if interest rates decline, the market value of existing T-bills typically increases. This dynamic is particularly evident in the secondary market, where T-bills can be bought and sold before their maturity date.

When T-Bills Can Appear to “Lose Value”

T-bills can appear to “lose value” under specific circumstances, primarily if they are sold before their maturity date or due to inflation. If an investor sells a T-bill on the secondary market before it matures, its price can be lower than the original purchase price. This occurs when interest rates rise after the T-bill’s initial purchase, making the existing T-bill less attractive compared to newer securities offering higher yields. For example, if an investor buys a $1,000 face value T-bill for $980, but then market interest rates significantly increase, they might have to sell that T-bill for $970 in the secondary market, resulting in a nominal capital loss of $10.

Beyond nominal capital losses, T-bills can also lose value in terms of purchasing power due to inflation. While the U.S. government guarantees the repayment of the T-bill’s face value at maturity, this repayment may purchase less goods and services than when initially acquired if inflation has been high. If the rate of inflation exceeds the yield earned on the T-bill, the investor experiences a negative real return, meaning their money has less buying power. This erosion of purchasing power is a real loss in value, distinct from a nominal loss where the cash amount received is less than the cash amount invested. It is important to distinguish between a nominal loss, which is a direct reduction in the dollar amount of the investment, and a real loss, which refers to a decrease in the investment’s buying power over time.

T-Bills Held to Maturity

Despite potential losses, holding a T-bill until its maturity date provides a high degree of certainty for investors. When a T-bill is held to maturity, the U.S. Treasury guarantees to pay the investor the full face value. This characteristic effectively mitigates the risk of a nominal capital loss, regardless of any fluctuations in interest rates that may have occurred during the holding period.

The guarantee of receiving the full face value at maturity makes T-bills a very low-risk investment for those who can commit to holding them to term. The “loss of value” discussed previously primarily applies to investors who might need to sell their T-bills before maturity due to unforeseen circumstances, or to the more subtle impact of inflation on purchasing power. For investors with a clear, short-term financial objective and the ability to hold their investment, T-bills remain a reliable option for capital preservation.