Warrior Trading Blog

U.S. Treasury (T-bills) Definition: Day Trading Terminology

US Treasury T bill photo

UST is the colloquial trading acronym used for United States Treasury Bills, or ‘T-Bills’.

UST are short-term debt securities (less than one year) issued by the federal government to finance their operations and existing obligations, and come in a range of maturities and discount prices sold in denominations of $1,000 each.

Discounts Vs Interest

UST are sold at a ‘discount’ to their redemption value that reflects the implicit interest rate that they pay out to the holder.

For example, a 6 month UST sold at a $960 discount value would have an implicit interest rate of 8.5%, which would bring the discount value of $960 up to the redemption value of $1,000 after a 6 month interest payment of 8.5%.

UST Auctions

UST are sold at auctions with a competitive and non-competitive bid system.

Competitive bids are set according to the implicit desired yield that the bidder is willing to receive for purchasing the UST.

Non-competitive bids are set according to a desired dollar value of UST given the average resulting yield from the competitive bid process.

UST are also heavily traded in secondary markets, as well as being used in a variety of lending arrangements and open market operations.

Valuing UST

Since UST are backed by the ‘full faith and credit’ of the US federal government, they are perceived to be some of the safest securities in the world.

However, and especially in more recent times, UST valuation has been influenced by federal government budgetary issues, particularly around budget votes and ‘government shutdown’ periods.

That said, the value of UST in general are far more influenced by other activities in the market that affect competitive investments.

For example, during times of general market risk, investors are drawn to UST for their comparative safety.

By contrast, existing UST are sold at a discount when alternate short term interest rates (on 2 year government bonds, for example) are perceived to be on the rise.

Trading and UST

Day traders looking to trade in the UST secondary markets will find lively price action that responds well to many traditional day trading techniques.

While the range of price action in UST is generally more subdued in both relative and absolute terms when compared to equities or commodities, the high degree of range bound volatility makes it an ideal market for making many small quick trades, which day traders are particularly well-positioned to do successfully.

That said, day traders looking to trade in the UST secondary markets should be aware of the idiosyncrasies and nuances of these markets, in particular the drivers of UST price action and the size of many of the large players who can dramatically influence prices.

Final Thoughts

Although the secondary markets for UST have their own unique features, they generally respond well to traditional day trading techniques.

Day traders looking to trade in the secondary markets for UST should be aware that they operate differently from equity markets. However, those day traders who spend the time to become accustomed to these differences will find a lively market with many profitable day trading opportunities.