Choosing a Treasury Bill Benchmark for a Short-Horizon Bond Comparison

Summary

The document considers how to compare a fixed-income security’s price series with a US Treasury bill as a risk-free benchmark, particularly when the intended holding period is only a few days. It notes that there is no universally correct maturity to use and identifies one-month bills, three-month bills, and overnight rates as common choices in research and practice.

The response favors the one-month bill, reasoning that it is more liquid and is perceived to have less risk than a longer-maturity bill. It also invokes the general idea that longer-maturity fixed-income securities carry greater perceived risk. This is a qualitative recommendation rather than a comparison backed by data or a worked calculation. The document does not explain how to align benchmark returns with a two-to-three-day horizon, account for bill yield conventions, or distinguish a price comparison from an excess-return calculation, so those choices remain for the analyst to resolve.

Key ideas

• There is no single prescribed Treasury bill maturity for a risk-free benchmark.
• One-month and three-month bills, as well as overnight rates, are cited as common choices.
• The response recommends a one-month bill based on liquidity and perceived risk.
• A short holding horizon does not by itself determine the appropriate benchmark maturity.

Tags

# Bond in relation to US T-Bill/Risk-Free rate


# Bond in relation to US T-Bill/Risk-Free rate












By looking at the following charts , i wondered about how to plot a fixed income security against a risk free bond.

I have the bond price time series but I am not sure what US T-Bill rate I should use as a benchmark for my plot.

My horizon would be 2-3 days so I don't want to hold the bond forever.

## Answer by Quantopik (score 1)

https://quant.stackexchange.com/a/17682

There does not exist a rule to choose properly the risk-free rate, but, usually, one chooses the 1-month T-Bill or the 3-month T-Bill in the academic literature; often, it used the overnight interest rate too.

I suggest you to choose the 1st one, because, according to me, it mirrors better the concept of risk-free, since it is more liquid and with less perceived risk than the 3-mont one. Moreover, a fixed- income security is perceived as riskier as longer is the maturity, so, reasonably, you should use the 1-Month T-Bill rate as risk free rate.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.