Let's be real. Nobody used to talk about the 5 year t bill at dinner parties. It was the "middle child" of the Treasury world—not as snappy as the 4-week bill and not as prestigious as the 10-year benchmark. But things changed. When inflation started hitting like a freight train and the Fed began its aggressive hiking cycle, investors suddenly realized that locking in a yield for half a decade wasn't just a boring move; it was a tactical one.
You’ve probably noticed that the yield curve has been acting weird for a while. In a normal world, you get paid more for waiting longer. You'd expect a 10-year bond to pay way more than a 5-year one. But we haven't lived in a "normal" world for years.
What exactly is a 5 year t bill anyway?
Technically, the "bill" label is a bit of a misnomer that people throw around. The Treasury Department actually classifies these as Treasury Notes because their maturities range from two to ten years. "Bills" are usually one year or less. But since everyone searches for the 5 year t bill, let's stick to what matters: it's a debt obligation issued by the U.S. government. You lend Uncle Sam your cash for five years, and in exchange, he pays you a fixed rate of interest every six months until the note matures. At the end, you get your initial principal back.
It's backed by the "full faith and credit" of the United States. That's a fancy way of saying it's about as close to "risk-free" as you can get in a universe where nothing is truly guaranteed. If the U.S. government stops paying its T-notes, your brokerage account is probably the last thing you'll be worried about.
The yield trap and why people get it wrong
Most people look at the headline yield and stop there. That's a mistake. You have to consider the "real" yield—the nominal rate minus inflation. If a 5 year t bill is paying $4.2%$ but inflation is running at $3.5%$, you’re only gaining $0.7%$ in actual purchasing power.
There's also the "reinvestment risk" factor. Imagine you keep rolling over 3-month bills because they have a higher yield right now (which happens during an inverted yield curve). If the Fed suddenly cuts rates next year, you’re stuck reinvesting that money at a much lower rate. By locking in a 5-year rate today, you’re basically betting that rates will be lower in three years than they are right now. It's a hedge. It's security. It's a way to tell the market, "I'm happy with this number, regardless of what the headlines say in 2027."
Buying through TreasuryDirect vs. a Brokerage
Honestly, the TreasuryDirect website looks like it hasn't been updated since the Clinton administration. It’s clunky. It’s frustrating. But it's also the only way to buy these directly from the source without a middleman.
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- TreasuryDirect: You buy at auction. You get the non-competitive bid, meaning you accept whatever yield the market determines. No fees.
- Secondary Market: This is where you go through a broker like Schwab or Fidelity. The advantage here is liquidity. If you need to sell your 5-year note after only two years, you can do it instantly on the secondary market.
Just keep in mind that if you sell early and interest rates have gone up, the value of your bond will have gone down. This is the basic inverse relationship of bonds. If you hold to maturity, this doesn't matter. You get your par value back. But if you’re a "paper hands" investor who might need the cash for a kitchen remodel in three years, the 5 year t bill carries some price risk that shorter bills don't.
The Tax Advantage Nobody Mentions
This is the kicker. Interest earned on U.S. Treasuries is exempt from state and local taxes. If you live in a high-tax state like California or New York, a $4%$ yield on a Treasury is actually worth more than a $4%$ yield on a CD (Certificate of Deposit) or a high-yield savings account.
Calculate your tax-equivalent yield. It's simple math, but it's often the difference between a mediocre investment and a great one. For a high-earner in Manhattan, that state and city tax exemption is massive. It’s like getting a secret bonus from the government.
Why the 5-Year is the "Sweet Spot"
Right now, the 5-year maturity sits in a unique spot on the curve. It offers more protection against interest rate volatility than the 10-year or 30-year "long bonds," but it pays significantly more than what we saw during the "zero-interest-rate policy" (ZIRP) era.
Think of it as a bridge. It’s long enough to provide meaningful income for a medium-term goal—like a down payment on a house or a child’s college tuition—but short enough that you aren't locking your money away for a literal decade.
How to actually play this
Don't just dump all your cash into a single auction. That’s amateur hour. Use a "ladder" strategy.
You could buy some 2-year notes, some 5 year t bill units, and maybe some 7-year notes. As the shorter ones mature, you reinvest them at the current 5-year or 10-year rates. This smoothens out the volatility of interest rate changes. It ensures you always have some cash becoming liquid soon while keeping a portion of your portfolio anchored in those higher, longer-term yields.
Is there a downside?
Of course. The biggest risk isn't default; it's opportunity cost. If inflation rockets back up to $8%$, your $4%$ return is actually a $4%$ loss in "real" terms. You’re locked in. You’re watching the world get more expensive while your check from the Treasury stays exactly the same.
Also, the "opportunity cost" of not being in the S&P 500. Over any 5-year period, the stock market has historically outperformed Treasuries. But stocks can also drop $20%$ in a week. Treasuries don't do that. You’re paying for the ability to sleep at night.
Actionable Steps for the Skeptical Investor
- Check the Current Auction Schedule: The Treasury auctions 5-year notes once a month. Look up the "Treasury Auction Schedule" to see when the next one drops.
- Compare the Spread: Look at the 2-year vs. the 5-year. If the 2-year is paying way more, the curve is inverted. In that case, you’re paying a "premium" (in lost interest) for the safety of locking in a rate for longer.
- Open a Brokerage Sub-Account: Don't mix your "safe" Treasury money with your "gambling" stock money. Create a separate bucket so you aren't tempted to sell your notes to buy the latest AI meme stock.
- Consider an ETF as an Alternative: If you hate the idea of buying individual notes, look at something like the IEI (iShares 3-7 Year Treasury Bond ETF). It gives you exposure to that 5-year range with the ease of clicking a "buy" button on your phone, though you'll pay a tiny expense ratio.
- Automate Reinvestment: If buying through TreasuryDirect, check the box to automatically reinvest the proceeds. It’s the easiest way to build wealth without thinking about it.
The 5 year t bill isn't going to make you "Lamborghini rich" overnight. It's not sexy. It’s not a "disruptive technology." It is, however, the bedrock of a sophisticated portfolio. It’s the part of your money that stays put when the rest of the market is losing its mind.