Treasury Bills, Notes, and Bonds: Understanding US Government Debt

Treasury Bills, Notes, and Bonds: Why They Matter

The U.S. Treasury market is the backbone of global finance. Whether you are a retiree chasing safe income, a money-market fund manager parking short-term cash, or a foreign central bank looking for reserves, Treasury securities provide the benchmark for "risk-free" returns. Yet many investors struggle to distinguish between Treasury bills, notes, and bonds. Knowing how each instrument works, and where it fits in the yield curve, can help you make smarter allocation decisions and read macroeconomic signals more accurately.

What Makes All Treasuries Alike

All Treasury securities are debt obligations issued by the U.S. federal government. Because they are backed by the “full faith and credit” of the United States, they carry virtually zero default risk. Interest earned at the federal level is taxable, but the securities are exempt from state and local income taxes, an advantage versus many corporate bonds. Treasuries are also highly liquid; they trade around the clock in a market whose daily volumes rival those of U.S. equities. Finally, every Treasury security is quoted as a percentage of face value and can be bought directly through TreasuryDirect or indirectly via brokers, banks, and ETFs.

Treasury Bills: The Short-Term Powerhouse

Treasury bills, or T-Bills, are the shortest-dated U.S. government obligations. They mature in one year or less, with the most common tenors being 4, 8, 13, 26, and 52 weeks. Unlike notes and bonds, T-Bills do not pay coupon interest. Instead, they are sold at a discount to par and redeemed at 100% of face value. The difference between the purchase price and par represents the investor’s return. Because of their minimal price volatility, bills are popular with cash managers, corporations, and individual savers who need a predictable place to park funds without tying them up for long.

Key Features of T-Bills

• Maturities: Up to 12 months
• Interest: Zero-coupon; sold at discount
• Typical buyers: Money-market funds, corporate treasurers, conservative investors
• Use case: Liquidity management, short-term savings, benchmark for risk-free rate

Treasury Notes: The Middle of the Curve

Treasury notes, often called T-Notes, fill the intermediate segment of the yield curve with maturities of 2, 3, 5, 7, and 10 years. Notes pay semiannual coupon interest and return principal at maturity. Because they span several economic cycles, their yields are closely watched indicators of economic expectations and Federal Reserve policy. The 10-year note, in particular, serves as a barometer for mortgage rates, corporate borrowing costs, and equity valuations.

Key Features of T-Notes

• Maturities: 2–10 years
• Interest: Fixed coupons, paid twice a year
• Typical buyers: Pension funds, insurance companies, bond mutual funds, retail investors
• Use case: Core fixed-income holding, duration management, snapshot of economic outlook

Treasury Bonds: Long-Term Commitments

Treasury bonds, or T-Bonds, represent the longest standard maturity offerings from the U.S. Treasury, currently issued at 20 and 30 years. Like notes, they pay semiannual coupons. Because of their long duration, bond prices are highly sensitive to changes in interest rates. This makes them useful hedging tools for managing long-term liabilities such as pension obligations, but it also means investors must be comfortable with greater price swings.

Key Features of T-Bonds

• Maturities: 20 and 30 years
• Interest: Fixed coupons, paid semiannually
• Typical buyers: Long-horizon investors, liability-driven funds, foreign reserve managers
• Use case: Duration extension, liability matching, macro hedging

How Treasuries Are Sold

The Treasury Department finances government spending through regular auctions. Competitive bidders specify yield requirements, while non-competitive bidders—often individual investors—accept the auction clearing yield. Once issued, securities trade in the secondary market via dealers and electronic platforms. Pricing transparency is high, and bid-ask spreads are among the tightest in any asset class.

Why Investors Hold Treasuries

Safety: The U.S. government has never defaulted on its debt, making Treasuries the global standard for safety.
Liquidity: Depth and constant trading mean investors can enter or exit positions quickly.
Diversification: Treasuries often rally when risk assets fall, offering a hedge during recessions or market panics.
Income: Predictable coupon payments suit investors seeking steady cash flow.

Risks to Consider

Although default risk is negligible, Treasuries are not risk-free. The primary concern is interest-rate risk: when rates rise, prices fall, especially for longer maturities. There is also inflation risk, where rising consumer prices erode real returns. Finally, reinvestment risk affects bill investors if rates drop by the time their short-term securities mature.

How to Invest in Treasuries

1. TreasuryDirect: Open a free account with the U.S. Treasury to buy securities at auction with no commissions.
2. Brokers: Most online brokers offer both new issues and secondary-market Treasuries, sometimes charging small markups.
3. ETFs & Mutual Funds: Broad-based funds like iShares’ GOVT or more targeted funds, such as SHV for bills or TLT for 20+-year bonds, let you trade Treasuries intraday.
4. Money-Market Funds: These funds frequently invest in T-Bills, letting you earn bill yields while enjoying check-writing privileges.

Reading the Yield Curve

The yield curve plots yields against maturities for all outstanding Treasuries. A normal, upward-sloping curve signals optimism about growth, while a flat or inverted curve often precedes recessions. Monitoring spreads between the 2-year note and the 10-year note, or between 3-month bills and 10-year bonds, can help investors anticipate shifts in monetary policy and economic momentum.

Tax Considerations

Interest from Treasuries is subject to federal income tax but exempt from state and local taxes. For residents of high-tax states, this advantage can meaningfully improve after-tax yields compared with corporate or municipal-bond alternatives.

Frequently Asked Questions

Can I lose money with Treasuries?

If you hold a Treasury to maturity you will receive par value, but you may incur mark-to-market losses if you sell before maturity and rates have risen.

Are Treasuries better than bank CDs?

Both are considered safe, but Treasuries offer superior liquidity, potential state-tax benefits, and the ability to sell before maturity without early-withdrawal penalties.

What is a STRIP?

STRIPS are "separate trading of registered interest and principal securities." The Treasury allows dealers to detach coupon and principal payments, creating zero-coupon bonds with various maturities, useful for duration targeting.

Key Takeaways

Treasury bills, notes, and bonds serve different time horizons but share the same U.S. government backing. Bills satisfy short-term liquidity needs, notes anchor the intermediate yield curve, and bonds fulfill long-term income and hedging roles. Understanding their unique characteristics, auction mechanics, and risk profiles empowers investors to harness these foundational assets effectively in any market environment.