Treasury Bills vs Money Market Funds: Yield, Cost and Liquidity

The short answer

A Treasury bill is a single security: you buy it at a discount, it matures on a known date, and the government pays face value. A money market fund is a portfolio: a professional manager keeps it inside regulatory maturity and liquidity limits, charges an expense ratio, and redeems shares at a price the board maintains.

For cash you will not touch until a known date, a bill removes both credit and price risk if held to maturity. For cash whose date you do not know, a fund’s daily redemption is the feature you are buying, and you pay for it through the expense ratio and a yield that resets as the portfolio rolls.

They are close substitutes, not identical ones. The differences that matter are maturity, price certainty, minimum size, fees and the convention each uses to quote yield.

What a Treasury bill is

TreasuryDirect’s bill page sets out the terms plainly:

• Terms: 4, 6, 8, 13, 17, 26 and 52 weeks. Cash Management Bills exist but are sold only through banks, brokers and dealers, not through TreasuryDirect.
• Pricing: sold at a discount or at par; at maturity you receive face value. The page is explicit that for bills “interest” is the difference between what you paid and the face value.
• Minimum and increments: $100 minimum, $100 increments.
• Maximum: $10 million on a non-competitive bid, or 35% of the offering amount on a competitive bid.
• Auction frequency: weekly for 4, 6, 8, 13, 17 and 26-week bills; every four weeks for the 52-week bill. The T-bill auction guide covers how a competitive and non-competitive bid are filled.
• Tax: federal tax is due on the interest; there are no state or local taxes.
• STRIPS: bills are not eligible to be stripped, unlike notes and bonds, which the STRIPS guide explains.

Two of those rows do more work than they look. The $100 minimum is what makes bills accessible without a broker, and the tax line is the one advantage a bill keeps over a fund even when the yields are close: the discount is exempt from state and local income tax.

A bill has no coupon and no reinvestment decision inside its term. The discount is realised at maturity, which means the realised return is exactly the purchase price and the maturity date allow, provided you hold.

What a money market fund is

A money market fund is a registered fund that meets Rule 2a-7. The rule’s risk-limiting conditions are the part worth knowing:

• Maximum instrument maturity: 397 calendar days.
• Weighted average maturity (WAM): no more than 60 calendar days.
• Weighted average life (WAL): no more than 120 calendar days, measured without the interest-rate readjustment exceptions.
• Daily liquid assets: the fund may not acquire a non-daily-liquid security if that would leave it with less than 25% of total assets in daily liquid assets.
• Weekly liquid assets: the same test at 50% for weekly liquid assets.
• Board notification: the fund must notify its board within one business day if daily liquid assets fall below 12.5% or weekly liquid assets below 25%.

Those numbers are the regulatory definition of “cash-like”. A fund cannot reach for yield by extending maturities far beyond two months on average, and it must keep a large slice maturable within one business day.

The pricing rule is the second thing to know, because it separates fund types.

• A government or retail money market fund may compute its share price using the amortized cost method or penny rounding, provided the board determines in good faith that doing so is in shareholders’ interest and that the methods fairly reflect market-based value. That is how a stable $1.00 price exists.
• Any fund that is neither government nor retail must compute its price by rounding net asset value to at least the fourth decimal place. That is a floating price.

So “money market fund” does not mean “stable $1.00”. It means a fund inside the rule’s limits, with the pricing convention set by its category.

The rule also permits a discretionary liquidity fee of up to 2% of the value of shares redeemed, if the board including a majority of independent directors determines it is in the fund’s best interest. Government funds are exempt from that requirement but may opt in. That is the mechanism behind the phrase “breaking the buck” being more than a metaphor: in stress, redemption can cost more than the share price suggests.

Side by side

The quote conventions are not the same unit

This is where most comparisons go wrong. A bill is quoted on a bank discount basis, and a fund is quoted on a seven-day yield that is already net of expenses. Neither number is the return you will earn, and they are not comparable to each other without conversion.

Take a 13-week bill — 91 days — with a 3.80% discount rate and $10,000 face value.

price = 10,000 × (1 − 0.0380 × 91/360)
      = 10,000 × (1 − 0.0096056)
      = 9,903.94
discount = 96.06

The discount is 96.06 USD. Now convert it to an investment yield over a 365-day year:

investment yield = (96.06 ÷ 9,903.94) × (365 ÷ 91)
                 = 0.0096992 × 4.01099
                 = 3.891%

The same bill quoted at 3.80% discount returns 3.891% on the money actually invested. The gap exists because the discount rate is applied to face value rather than to the price, and because the convention uses a 360-day year while the holding period is measured in calendar days.

A fund quoted at a 3.80% seven-day yield is a different statement: 3.80% is already net of the expense ratio, and it describes the last seven days annualized, not a rate locked for 91 days. On $10,000 over the same 91 days:

fund income ≈ 10,000 × 0.0380 × 91/365 = 94.74

So the bill returns 96.06 and the fund 94.74 on the same headline 3.80% — but only because the headline numbers mean different things. The honest comparison is 3.891% against 3.80%, and even that is a snapshot: the fund’s yield will change as its portfolio rolls, tracking short-term rates such as repo and the policy rate, which the repo versus policy rate guide distinguishes.

Cost, in the places it hides

The bill’s cost is easy to miss because there is no line item. It shows up as:

• The bid-ask spread on an early sale. A bill sold before maturity trades at a market price, and the dealer’s spread is a real cost that the “no expense ratio” comparison omits.
• The auction cycle. Weekly auctions mean a maturity date you choose from a schedule, not a date you pick.
• Reinvestment gaps. When a bill matures, the proceeds sit in a non-interest-bearing account until you buy again. A fund reinvests internally.

The fund’s cost is the opposite: an explicit expense ratio, disclosed and deducted daily, plus the possibility of a liquidity fee in stress. What it buys is continuous reinvestment, daily redemption and no auction calendar.

Neither cost is dominant in general. The point is that “expense ratio versus nothing” is an incomplete comparison.

Tax treatment, briefly

Treasury’s page states the rule for bills: federal tax on the interest, no state or local taxes. That is a genuine advantage in a state with an income tax.

For a fund, the answer depends on the portfolio. A fund that holds Treasury obligations publishes the share of its income attributable to US government obligations, and states differ on whether and how that share is exempt. The fund’s tax supplement is the source, not the fund’s marketing page.

In both cases the income is ordinary income, not capital gain, which matters for an investor comparing a bill with a short-term bond fund.

A decision rule

1. Known date, no access needed before it: a bill held to maturity removes price risk and the state tax.
2. Unknown date, or cash that must be reachable: a fund, accepting the expense ratio as the price of daily redemption.
3. Large balance with a known date: bills, noting the $10 million non-competitive cap per auction.
4. Small balance: bills are accessible at $100 through TreasuryDirect; fund minimums are set by the fund or broker.
5. Comparing the two: convert the bill’s discount rate to an investment yield first, then compare with the fund’s net seven-day yield. Never compare a discount rate with a fund yield directly.
6. Stress scenario: ask what happens to each. A bill held to maturity is unaffected by rate moves; a fund’s board can impose a liquidity fee, and a non-government fund’s price floats.

Risk note. Bill terms, minimums, auction frequency and tax treatment were read from TreasuryDirect’s Treasury Bills page on 2026-10-28. Fund maturity, liquidity, pricing and liquidity-fee provisions were read from 17 CFR 270.2a-7 on the same date. The 3.80% figures are a constructed example for arithmetic, not a market quote; current bill yields come from Treasury auction results and current fund yields from each fund’s published seven-day yield.