Treasury bills, or T-bills, are one of the lowest-risk investment products available because they’re issued by the government. While the rate of return may not be very high, there’s zero chance that you’ll lose any money.
That said, even guaranteed investments come with pros and cons, which is why you need to understand how T-bills work before you decide if they fit into your financial plans.
What are T-bills in Canada?
When provincial and federal governments need to raise capital, they issue T-bills that the public can purchase. These debt securities are 100% guaranteed. Both your principal and interest are backed by the government, regardless of how much you invest.
You can purchase T-bills directly from most financial institutions and investment firms. In most cases, T-bills are issued in denominations starting at $1,000. That said, some mutual funds focus on fixed-income products, including T-bills, so it’s possible to invest at a lower cost of entry.
It’s best to think of T-bills as a form of fixed income since they’re fully guaranteed. They’re great for short-term investments or if you want to keep your money safe, but they provide little growth opportunity. For this reason, T-bills are often lumped together with bonds, term deposits and money market funds.
How do T-bills in Canada work?
Even though you get a guaranteed rate of return when purchasing T-bills, you’re not technically earning interest like you would with a guaranteed investment certificate. The yield you get is the difference between what you bought the T-bill for and what you sell it for when it matures.
Some new investors may be confused about how this works, but essentially, T-bills are sold at a discount. What that means is you buy T-bills at below their actual value. When you sell them back to the financial institution at the maturity date, they’ll be at “par value,” or their actual value. Since T-bills are worth more when you sell them, you’ll have made money.
For example, let’s say you bought a T-bill for $950. After one year, it matures and is worth $1,000. When you sell it, you’ll have made $50 on your investment. The capital gains made on T-bills are fully taxable if you hold them outside of a non-taxable account, such as your Tax-Free Savings Account (TFSA).
How T-bill yields work
As mentioned, the yield of T-bills is the difference between its value at the time you bought it compared to the time you sell it. This is known as the effective yield rate. However, if you decide to sell your T-bill early, you need to calculate how much interest you’ve earned while you held the T-bill. You can do this by using the following formula.
Purchase price × Effective yield rate × Number of days T-bill held ÷ Number of days in the year sold = Interest earned as income
Since T-bills are a form of fixed income, the overnight interest rate set by the Bank of Canada affects T-bill interest rates. Basically, when the Bank of Canada has a low prime rate, you should expect low yield rates from T-bills.
Pros and cons of T-bills in Canada
T-bills can be a good investment product for your portfolio. However, they still have some pros and cons that you’ll want to consider.
Pros of T-bills
- Guaranteed interest and principal
- Can sell at any time
- Available for purchase in non-taxable accounts
Cons of T-bills
- Low potential rate of return compared to equities
- Yields provided may not beat inflation
- Fully taxable when held in a taxable account
Treasury bills are a safe investment that provides you with some fixed income in your portfolio. You won’t get rich from them, but they will give you some security and can balance out other, riskier investments.
About the Author
Barry Choi
Barry Choi is a freelance personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and…
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FAQs
Treasury bills are a type of “zero coupon bond” and don't pay a fixed interest rate. Instead, they are sold at a discount rate to their face value. The “interest” you receive (so to speak) is the difference between the face value of the bill and its discount rate when it matures.
How do Canadian T-bills work? ›
T-bills are issued with 3 month, 6 month, and 1 year maturities. T-bills are sold at a discount. This means that you buy T-bills for a price less than their par (face) value, and when they mature, the government pays you their par value. This is different than coupon bonds, which pay interest semi-annually.
What is the return on the Canadian T-bills? ›
Basic Info. Canada 1 Month Treasury Bill Yield is at 4.89%, compared to 4.91% the previous market day and 4.31% last year. This is higher than the long term average of 4.07%.
What is the primary difference between Canadian Treasury bills and Canadian Treasury bonds? ›
Treasury bonds have maturities of 20 or 30 years and pay interest every six months. In contrast, Treasury bills have much shorter maturities, from a few days to 52 weeks. Treasury bills are sold at a discount to their face value and do not pay interest before maturity.
How do T-bills work for dummies? ›
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). * When the bill matures, you would be paid its face value, $1,000.
What is the downside of T-bill? ›
T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market. T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.
What is the interest rate on Canada T-bill? ›
Basic Info. Canada 1 Year Treasury Bill Yield is at 4.68%, compared to 4.70% the previous market day and 4.54% last year. This is higher than the long term average of 4.27%.
Are T-bills taxable in Canada? ›
The capital gains made on T-bills are fully taxable if you hold them outside of a non-taxable account, such as your Tax-Free Savings Account (TFSA).
What is the yield of the Canadian 1 month treasury bill? ›
The Canada 1 Month Government Bond has a 5.015% yield (last update 19 May 2024 2:15 GMT+0).
What is the 2 year T bill rate in Canada? ›
Selected benchmark bond yields
| Series | 2024‑05‑10 | 2024‑05‑15 |
|---|
| Government of Canada benchmark bond yields |
|---|
| 2 year | 4.29 | 4.18 |
| 3 year | 4.16 | 4.03 |
| 5 year | 3.77 | 3.64 |
5 more rowsInstead of purchasing T-bills directly from the Bank of Canada, you can purchase them from your financial institution or an independent investment firm. They can be purchased individually or included in an investment portfolio.
What is the 3 month T-bill rate in Canada? ›
Treasury bills
| Series | 2024‑04‑17 | 2024‑04‑24 |
|---|
| 1 month | 4.89 | 4.91 |
| 3 month | 4.89 | 4.91 |
| 6 month | 4.86 | 4.86 |
| 1 year | 4.71 | 4.75 |
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
What happens when a T-bill matures? ›
When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
Can you pull money out of T-bills? ›
You can sell a T-Bill before its maturity date without penalty, although you will be charged a commission. (With CDs, you pay a sizeable penalty for early withdrawals.)
What is a treasury bill in Canada? ›
What are Treasury bills? Treasury bills are debt securities issued by provincial and federal governments. They're a safe product, easy to understand and available at a relatively affordable price.
Are Canadian Treasury bills a good investment? ›
It's best to think of T-bills as a form of fixed income since they're fully guaranteed. They're great for short-term investments or if you want to keep your money safe, but they provide little growth opportunity. For this reason, T-bills are often lumped together with bonds, term deposits and money market funds.
How are Canadian T-bills taxed? ›
Treasury bills, or T-bills, are purchased at a discount from maturity value. The difference between maturity value and purchase price is taxed as interest income. If the T-bill is sold prior to maturity, a capital gain or loss will result. See the glossary item on treasury bills for an example.
How do you get paid on T-bills? ›
We sell Treasury Bills (Bills) for terms ranging from four weeks to 52 weeks. Bills are sold at a discount or at par (face 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.
How do Canadians buy US T-bills? ›
There are a few ways to buy them in Canada. You can: Buy T-bills from the financial institution: it is possible to buy T-bills directly from a financial institution that issues them. Buy T-bills through a broker: Online brokers and banks can also give you access to T-bills.
