Treasury Bills vs Money Market Funds: Yield, Tax, and Risk

By Chanuka Geekiyanage Oct 20, 2026

If you park idle cash in a brokerage, a stablecoin, or an on-chain Treasury token, the real choice is usually the same one: hold T-bills directly, or hold them through a money market fund. Both sit near the top of the safe-yield ladder, but they differ in how yield is quoted, how state tax is handled, and what can break under stress. This article compares them on yield, tax, liquidity, and risk using October 2026 data, then shows where tokenized Treasury products such as BUIDL, USYC, USDY, and BENJI fit.

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Yield: What the Numbers Say in October 2026

The Fed raised its target range to 3.75% to 4.00% on September 16, 2026, its first hike since 2023. In the latest auction I could verify (September 28), the 13-week bill sold at an investment rate of 4.211%. Crane Data’s Crane 100 index, an average of the 100 largest taxable money funds, was 3.66% for the week ended September 25 and showed 3.69% in early October.

Bills therefore pay roughly half a percentage point more than the average money fund. Three things likely explain most of the gap:

Money funds report yield net of expenses, while an auction rate is a gross figure for a fixed term.
Funds reprice gradually. Crane reports average maturities of 37 to 38 days, so a hike takes weeks to show up fully.
Bills price in expected hikes. CNN reported that 16 of 18 FOMC officials forecast another increase this year.

The gap is not free money. If the Fed hikes faster than the bill market assumed, a money fund catches up and a long bill falls behind. If hikes stall, the bill wins.

Tax: Where T-Bills Pull Ahead

This is general information, not tax advice. Both products produce federally taxable ordinary income. The difference is state and local tax.

T-bill interest is exempt from state and local income tax. It is reported in the year the bill matures, or the year you sell it early, so choosing a maturity after December 31 moves the income into next year.

Money funds are messier. Only the share of dividends earned on US government obligations is state exempt, and the 1099-DIV often does not show it. California, Connecticut, and New York also require at least 50% of fund assets in those obligations at each quarter end, or none of the dividends are exempt.

Funds differ widely. For tax year 2024, Vanguard Treasury Money Market (VUSXX) reported 100% government-obligation income, Vanguard Federal Money Market (VMFXX) 59.87%, and Fidelity Treasury Money Market (FZFXX) 50.56%. A fund with “Treasury” in its name is not always mostly Treasury.

On $100,000 earning about 3.7% ($3,700 a year), a 6% state rate costs $222 if the income is fully taxable and nothing if it is exempt.

Risk and Liquidity

A T-bill carries US government credit risk. Held to maturity, there is no price risk. The real bill risk is reinvestment, since each rollover happens at whatever rate prevails that day.

Money funds are not FDIC insured, and the stable $1 share price is a goal, not a guarantee. ICI reported that at the end of August 2026 government funds held 87.0% of assets in weekly liquid assets, versus 60.8% for prime funds, against a 50% regulatory minimum. The Reserve Primary Fund broke the buck in 2008, and prime funds saw heavy outflows in March 2020, so prime funds deserve more scrutiny than Treasury-only funds.

How They Compare

Option	How you earn	State tax	Liquidity	Main risk	Best for
T-bill (TreasuryDirect or brokerage)	Discount, fixed at purchase	Exempt	Maturity or secondary-market sale	Reinvestment and rate timing	High-tax-state savers, ladders
Treasury-only money fund	Variable 7-day yield, monthly dividends	Mostly exempt, verify the percentage	Daily	Expense drag, percentage slippage	Cash you may need soon
Government money fund	Variable 7-day yield	Partial, often 50% to 60%	Daily	Weaker state-tax result	Convenience, no-income-tax states
Prime money fund	Variable, usually higher	Mostly taxable	Daily, fees possible in stress	Credit and liquidity risk	Tax-advantaged accounts only

Where Tokenized Treasury Funds Fit

Tokenized products wrap one of these two assets in a token. A summary of rwa.xyz data put tokenized Treasuries and money funds at about $15.65 billion across 101 products on September 15, 2026. ICI put total US money fund assets at $7.98 trillion in early September, so tokenized products are roughly 0.2% of that market. For how these tokens are used in DeFi, see our guide to tokenized Treasury bills and DeFi yield.

Image source: app.rwa.xyz/treasuries

Product	Wrapper	Size (Sept 15, 2026)	Fits	Watch for
BUIDL	BlackRock fund, issued through Securitize	$2.70B	Institutions, DAO treasuries	Eligibility and transfer rules
USYC	Circle (formerly Hashnote)	$2.60B	On-chain collateral and treasury use	Redemption terms, issuer concentration
USDY	Ondo, aimed at non-US holders	$2.23B	Non-US users wanting bill exposure	Not designed for US persons
iBENJI	Franklin Templeton; BENJI is built on a US-registered money fund	$1.70B	US-regulated fund exposure	Franklin runs several products; confirm which you hold

The wrapper does not change the underlying tax or credit profile. It adds issuer risk, smart-contract risk, whitelisting, and redemption-window risk. Ask the issuer for the government-obligation percentage before assuming any state-tax benefit.

What to Check Before You Commit Cash

Net yield. Compare the fund’s 7-day yield with the bill’s investment rate for the same horizon.
Government-obligation percentage. Confirm it clears the 50% test if you live in California, Connecticut, or New York.
Expense ratio. A 0.4% fee takes a large bite from a 3.7% yield.
Maturity dates. Match bill maturities to when you need the cash and to the tax year you want the income in.
Portfolio type. Prefer Treasury-only or government funds for core cash.
Tokenized products only: eligibility, redemption cutoffs, and whether a registered fund sits underneath.

My Take

For most US savers who pay state income tax, a T-bill ladder or a Treasury-only money fund beats a general government fund. Bills are my default when I know the cash will sit for a few months, because the exemption is clean. A Treasury-only fund is my pick when I need daily access.

In the current hiking cycle, I would keep bills short, 4 to 13 weeks, rather than lock in 26 weeks. I would avoid prime funds for core cash, since the extra yield does not pay for the 2008 and 2020 lessons. In a state with no income tax or inside an IRA, the exemption is worthless, so choose purely on net yield.

Tokenized funds make sense only when you need on-chain use. If your alternative is a stablecoin, read our tokenized money fund vs stablecoin comparison. The biggest practical risk is not default. It is assuming a tax benefit your state or fund does not give you.

Conclusion

Bills and money funds both deliver Treasury-backed yield, so the decision comes down to tax handling and flexibility. Bills give a locked rate and a full state exemption. Treasury-only money funds give daily access, with an exemption that depends on the fund’s portfolio.

The main risks are timing and assumptions. Long bills can lag in a hiking cycle, and prime funds or tokenized wrappers add risks Treasury-only funds avoid. Your next step is to pull the latest bill auction rate, your fund’s 7-day yield, and its government-obligation percentage, then compare them after state tax.

FAQs

1. Do I pay state tax on money market fund income from Treasuries?

Only the share earned on US government obligations is exempt in most states, and California, Connecticut, and New York require at least 50% of fund assets in those obligations at each quarter end. Check your fund’s annual percentage and enter it manually, since the 1099-DIV often does not show it.

2. Is a 13-week T-bill better than a money market fund when the Fed is raising rates?

It depends on whether hikes come faster than the bill price assumes, because a fund reprices within weeks while a bill is fixed until maturity. Shorter bills or a ladder reduce the risk of being stuck below a rising rate.

3. Can a money market fund lose money?

Yes, though government and Treasury funds rarely do, and the Reserve Primary Fund broke the buck in 2008. Money funds are not FDIC insured, so prime funds deserve more scrutiny than Treasury-only funds.

4. Are tokenized Treasury funds safer than stablecoins?

Their reserves are clearer because they hold Treasuries or government money fund assets, but you add issuer, smart-contract, and access risks. Compare redemption terms and eligibility before treating one as cash.

5. When is T-bill interest taxed?

Federal tax applies in the year the bill matures, or the year you sell it if you exit early. Choosing a maturity date after year-end moves that income into the next tax year.

References

TFTC, 13-Week Treasury Bill Rates (auction of Sept 28, 2026): https://www.tftc.io/treasury-bills/13-week

Crane Data, Daily Links Archives, September 2026: https://k8.cranedata.com/archives/daily-links/2026/9

Crane Data, Crane Index Archives: https://cranedata.com/publications/archives/crane-index/

ICI, Money Market Fund Assets (week ended Sept 2, 2026): https://www.webull.com/news/15516156626281472

Bankrate, Treasury Bills: https://www.bankrate.com/investing/treasury-bills

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About the Author: Chanuka Geekiyanage

Chanuka is a content writer, editor and contributor at Panaprium, specializing in long-form editorial articles. He conducts in-depth research and produces well-structured, carefully edited content with a strong focus on clarity, SEO best practices, and consistent formatting. His work spans lifestyle, fashion, wellness, and technical topics, and all articles are reviewed and refined to meet Panaprium’s editorial standards.

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