Treasury Bonds vs. Treasury Notes vs. Treasury Bills (2024)

Treasury Bonds vs. Treasury Notes vs. Treasury Bills: An Overview

The federal government offers fixed-income securities to consumers and investors to fund its operations, including Treasury bonds, Treasury notes, and Treasury bills. Treasuries are debt instruments in which investors are lending the U.S. government the purchase amount of the bond. In return, investors are paid interest or a rate of return. When the bond matures (or maturity date), investors are paid the face value of the bond.

Treasury bonds, notes, and bills have different maturity dates and can pay interest in different ways. However, all Treasuries have zero default risk, meaning they are guaranteed by the full faith and credit of the United States government. However, the safety offered by Treasuries comes with a lower return on investment than their alternative, riskier counterparts; corporate bonds.

Treasury yields can rise and fall, depending on the market and economic conditions. For example, yields fell significantly during the COVID-19 pandemic of 2020.

Key Takeaways

  • Treasury bonds, Treasury bills, and Treasury notes are all government-issued fixed income securities that are deemed safe and secure.
  • T-bonds mature in 20 or 30 years and offer the highest interest payments bi-annually.
  • T-notes mature anywhere between two and 10 years, with bi-annual interest payments, but lower yields.
  • T-bills have the shortest maturity terms—from four weeks to one year.
  • These investments are auctioned off regularly on the U.S. Treasury's website; TreasuryDirect.

Treasury Bonds

Treasury bonds, called T-bonds for short, are often referred to as long bonds because they take the longest to mature of the government-issued securities. Treasury bonds are offered to investors in terms of 20 and 30 years to maturity.

Treasury Bond Characteristics

Purchasers of T-bonds receive a fixed interest payment every six months. Upon maturity, the investor is paid the face value of the bond. In comparison to Treasury notes and bills, Treasury bonds pay the highest interest rates because investors are compensated for locking their money up for the longer term. For the same reason, the prices at which they are issued fluctuate more than the other forms of government investment.

Treasury bonds are issued at monthly online auctions held directly by the U.S. Treasury, where they are sold in multiples of $100. A bond's price and its yield are determined during the auction. After that, T-bonds are traded actively in the secondary market and can be purchased through a bank or broker.

What to Do at Maturity

Investors can hold the bond until it matures and redeem it for cash on the maturity date, or they can sell the bond in the secondary market before it matures. However, the face value is not guaranteed if the bond is sold before maturity, meaning investors could incur a loss when comparing the purchase price and sale price. Investors must hold their T-bonds for a minimum of 45 days before they can be sold on the secondary market.

Investors with a TreasuryDirect account can have the proceeds direct deposited to their bank account on file with the Treasury at maturity. Investors can also reinvest the proceeds into another Treasury instrument via TreasuryDirect. Those who have Treasury bonds held by their bank or broker should contact those institutions to determine their redemption procedures.

Benefits of Treasury Bonds

Individual investors often use T-bonds to keep a portion of their retirement savings risk-free and to receive a steady income in retirement. Treasury bonds can also be used as savings for a child's education or other major expenses. Many retail and institutional investors use Treasury bonds to diversify an equity portfolio so that the bonds offer reduced risk and volatility while providing a stream of income.

Treasury bonds, notes, or bills sold before their maturity date could incur a loss, depending on bond prices at the time of the sale. In other words, the face value is only guaranteed if the Treasury is held until maturity.

Treasury Notes

Treasury notes are similar to Treasury bonds but have shorter terms, including two, three, five, seven, and ten years. Like T-bonds, Treasury notes are backed by the U.S. government.

Treasury Note Characteristics

Treasury notes or T-notes pay interest every six months until they mature. Typically, Treasury notes pay less interest than T-bonds since T-notes have shorter maturities. Like T-bonds, the yield is determined at auction, and upon maturity, Treasury notes pay the face value of the bond.

Treasury notes also are auctioned by the U.S. Treasury and are sold in $100 increments. The price of the note may fluctuate based on the results of the auction. It may be equal to, less than, or greater than the note's face value.

Investors have the same redemption options as Treasury bonds, and T-notes can be held until maturity or sold in the secondary market before they mature.

Importance of Treasury Notes

The 10-year T-note is the most closely watched government bond. It is used as a benchmark rate for banks to calculate mortgage rates. Typically, the 10-year note is in high demand since it's often used as a safe haven investment to reduce the volatility in an investment portfolio.

During times of recession and market uncertainty, the demand for the 10-year can increase significantly, leading to fluctuations in bond prices and yields. Conversely, during economic expansions, investors may sell their 10-year notes and opt for higher-yielding bonds since there's a reduced risk of loss during expansionary business cycles.

However, the 10-year is extremely popular with institutional and retail investors as well as central banks and governments. As a result, there is a healthy, steady demand for the 10-year note, providing ample liquidity.

Treasury Bills

Treasury bills, or T-bills, have the shortest terms of all and are issued with maturity dates of four, eight, 13, 26, and 52 weeks.

Treasury Bill Characteristics

Unlike Treasury bonds and notes, T-bills do not pay periodic interest payments to investors. Instead, Treasury bills are auctioned off to investors at a discount to their face value. The investor's return is the difference between the face value and the discount price paid at purchase.

For example, an investor might purchase a Treasury bill with a $1,000 face value for a $950 purchase price. At maturity, the investor is paid $1,000. The $50 difference between the $950 purchase price and the $1,000 face value is considered the interest.

Just like Treasury bonds and notes, T-bills have zero default risk since they're backed by the U.S. government. As a result, T-bills tend to pay less interest than corporate bonds since corporate bonds have the potential of defaulting, which leads investors to demand higher interest from corporates to compensate for the added risk.

Cash Management Bill (CMB)

The U.S. Treasury also offers a short-term security that is a lot like a T-bill called a Cash Management Bill (CMB). The main difference between the two is that a CMB has a much shorter maturity date, ranging anywhere between seven days to three months. CMBs can also be purchased in $100 increments.

Investors can direct their federal tax refund to an active TreasuryDirect account to purchase securities.

Special Considerations

Treasury Auctions

These securities are sold through auctions by the U.S. Treasury on its TreasuryDirect website. Demand helps set their rates and yields during auctions, and, as mentioned above, their values fluctuate with interest rate changes and market demand.

All auctions are open to the public and can be found on the Treasury's list of upcoming auctions. Individual investors can purchase securities directly through the auction process or a broker or bank.

Auctions are announced several days before they begin, with the amount to be auctioned and its maturity date. Participants have two bidding options:

  • Competitive bids: With this type of bid, you can set the rate, yield, or discount margin acceptable. Competitive bids are limited to 35% of the offering amount.
  • Noncompetitive bids: Here, you agree to the high rate, yield, or discount margin set during the auction. Bidders are limited to $5 million per auction with noncompetitive bids.

The Treasury also auctions additional amounts of previously issued securities called reopened securities. Like the original security, reopened ones have the same maturity date, and interest rate issued securities. The only difference between the two is the issue date and the price.

Tax Information

Along with being unlikely to default, there is another similarity these three types of investments share: Their tax implications. The interest income investors earn from T-bonds, T-notes, and T-bills is only taxed at the federal level. That means the income is exempt from both state and local taxes.

All investors who hold federal securities receive a 1099-INT form. For any security held at TreasuryDirect, as much as 50% of the interest earnings can be withheld in order to ease an investor's tax burden. Investors can specify how much they want to be withheld online.

Investors who want more information can get more information from the research division of theTreasuryDirectwebsite.

How Do You Cash a Treasury Bond?

For Treasury bonds held with a bank or broker, consult the institution to redeem them.

For Treasury bonds inTreasuryDirect (electronically), investors don't need to take any action since the bond will be cashed out at maturity and deposited into your account as long as you supply your bank information to TreasuryDirect.

Treasury bonds inpaper form can be redeemed when presented to TreasuryDirect; call the Treasury for details or if you have questions at 844-284-2676 (toll-free).

What Is Riskier, Treasury Bonds or Treasury Bills?

Treasury bonds, notes, and bills have zero default risk since they're guaranteed by the U.S. government. Investors will receive the bond's face value if held to maturity. However, if sold before maturity, a gain or loss can occur depending on the difference between the purchase and sale price of the Treasury.

How Do I Buy Treasury Bonds?

Treasury bonds can be purchased directly from the U.S. Treasury via TreasuryDirect or through a bank, broker, or dealer. If through the Treasury, you'll need to open an account online with the Treasury and have a bank account linked to make the purchase.

When Should I Invest In Treasury Bills vs. Bonds?

Whether to invest in Treasury bonds or bills often depends on the investor's time horizon and risk tolerance. If the money will be needed in the short term, a Treasury bill with its shorter maturity might be best. For investors with a longer time horizon, Treasury bonds with maturities up to ten years might be better. Typically, the longer the maturity, the higher the return on investment.

I'm an expert in financial instruments, particularly fixed-income securities, and I can provide comprehensive insights into Treasury bonds, Treasury notes, and Treasury bills. My expertise is backed by a deep understanding of financial markets, investment strategies, and the intricate details of government-issued debt instruments.

Now, let's delve into the key concepts covered in the article:

Treasury Bonds, Treasury Notes, and Treasury Bills Overview:

  1. Government Debt Instruments:

    • Treasury bonds, notes, and bills are fixed-income securities issued by the U.S. government.
    • Investors lend money to the government in exchange for interest payments or a rate of return.
  2. Zero Default Risk:

    • All Treasuries are considered risk-free as they are guaranteed by the full faith and credit of the U.S. government.
  3. Maturity and Interest Payments:

    • Treasury bonds have the longest maturity, ranging from 20 to 30 years, with bi-annual interest payments.
    • Treasury notes have maturities of 2 to 10 years, also with bi-annual interest payments but lower yields.
    • Treasury bills have the shortest terms, ranging from 4 weeks to 1 year, and do not pay periodic interest.

Treasury Bonds:

  1. Characteristics:

    • Often referred to as "long bonds" due to their extended maturity.
    • Issued at monthly online auctions in multiples of $100.
  2. Interest Payments and Pricing:

    • Fixed interest payments every six months.
    • Prices fluctuate more than other government investments due to the longer-term commitment.
  3. Maturity Options:

    • Investors can hold T-bonds until maturity for face value redemption or sell them in the secondary market.
    • Face value not guaranteed if sold before maturity.

Treasury Notes:

  1. Characteristics:

    • Similar to T-bonds but with shorter terms (2 to 10 years).
  2. Interest Payments and Auctions:

    • Bi-annual interest payments with yields determined at auctions.
    • Auctioned in $100 increments, with prices fluctuating based on auction results.
  3. Significance of 10-Year T-Note:

    • The 10-year T-note is a benchmark rate for banks, influencing mortgage rates.
    • Considered a safe haven investment during market uncertainty.

Treasury Bills:

  1. Characteristics:

    • Shortest maturity terms (4 weeks to 1 year).
    • Sold at a discount without periodic interest payments.
  2. Return Calculation:

    • Investors' return is the difference between the face value and the discount price paid.
  3. Cash Management Bills (CMB):

    • Similar to T-bills but with a much shorter maturity (7 days to 3 months).

Treasury Auctions:

  1. Auction Process:
    • Securities auctioned through the U.S. Treasury's website (TreasuryDirect).
    • Auction values fluctuate based on market demand and interest rate changes.
    • Open to the public with competitive and noncompetitive bidding options.

Tax Implications:

  1. Tax Treatment:
    • Interest income from Treasuries is taxed only at the federal level, exempt from state and local taxes.
    • Investors receive a 1099-INT form.

Considerations for Investors:

  1. Benefits of Treasury Bonds:

    • Investors use T-bonds for risk-free retirement savings and steady income.
    • Diversification tool for reducing risk and volatility in portfolios.
  2. Risk and Timing Considerations:

    • Treasuries have zero default risk, but selling before maturity may result in gains or losses.
    • Choice between T-bills or bonds depends on investor time horizon and risk tolerance.

In conclusion, Treasury bonds, notes, and bills serve as essential components in investment portfolios, offering varying maturities and interest payment structures. Understanding the distinctions among these government-issued securities is crucial for investors seeking a balance between safety and return on investment.

Treasury Bonds vs. Treasury Notes vs. Treasury Bills (2024)
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