What are Treasury Bonds and Notes? (And How are They Different?)

The U.S. government regularly issues a form of assets known as securities to help pay for its ongoing expenses. These securities include Treasury bonds, Treasury notes, and more. Each type of these securities allows investors to lend money to the federal government in exchange for interest.

Bonds, notes, and other Treasury securities are quite similar. However, small but important differences exist between them. Before you invest in them, learn what they are, how they work, and their similarities and differences.

What are Treasury securities?

Treasury securities are a type of financial asset the U.S. federal government backs. They function as debt securities by allowing the government to borrow money from individual and institutional investors. In return, these investors earn an interest rate on the borrowed money.

The U.S. Department of the Treasury issues these securities, so they generally have a low chance of not being fulfilled or paid, otherwise known as defaulting risk. That’s why investors often see Treasury securities as a safe option when considering how to invest money.

However, Treasury securities are not risk-free. For example, rising inflation and interest rate risks may reduce the return investors earns on them. Additionally, the interest earned on these securities is subject to federal income tax — they’re exempt from state and local taxes — so the taxes you pay would reduce your return.

There are four types of Treasury securities. In addition to Treasury bonds and notes, the U.S. government issues Treasury bills and Treasury inflation-protected securities (TIPS). Investors could buy these assets directly through the government or a broker.

Treasury securities at a glance

	Treasury bills	Treasury notes	Treasury bonds	Treasury inflation-protected securities (TIPS)
Length of their term	Short	Medium	Long	Medium to long
Available terms	One, two, three, six, and 12 months	Two, three, five, seven, and 10 years	20 and 30 years	Five, 10, and 30 years
Return (as of July 2022)	Between 1.88% and 2.89%	Between 3.05% and 3.09%	Between 3.23% and 3.50%	Between 0.51% and 1.20%
Protects against inflation	No	No	No	Yes

What are the Treasury securities types?

Treasury securities come in one of four primary forms. Although several similarities exist between these four forms, some differences ultimately affect how they work and whom they might be suitable for.

1. Treasury bills

Treasury bills (T-bills) have the briefest term among Treasury securities. This term, known as the maturity term, cashes out your invested money after one, two, three, six, or 12 months.

One key feature of Treasury bills is that they do not pay interest every six months as bonds and notes do. Instead, they are auctioned off at a discount, and the discount amount is the investor’s return.

For example, you could purchase a $100 bill — the minimum purchase amount — for $99.98. The difference in price makes up your interest return once the bill matures.

Because T-bills mature in 12 months or less, they tend to have the lowest return of Treasury securities. Treasury bills offer about 1.88% to 2.89% return as of July 2022.

2. Treasury notes

Treasury notes (T-notes) are issued in longer terms than T-bills. The Department of Treasury issues two, three, five, seven, and 10-year Treasury notes.

The Treasury does not sell T-notes at a discount as it does with T-bills. Instead, the return of Treasury notes is determined at their sale auction, and they pay interest every six months. The Treasury sells T-notes at a minimum order of $100, and their current return rate is between 3.05% and 3.09% as of July 2022.

3. Treasury bonds

Treasury bonds (T-bonds) have the longest maturity time among Treasury securities. A Treasury bond matures in 20 or 30 years.

Like Treasury notes, Treasury bonds also receive interest payments every six months until they mature. Because they take so long to mature, T-bonds often have the highest return among Treasury securities.

T-bonds are sold at Treasury auctions at base cost or face value of the bond with a minimum purchase of $100. The bond’s price and return are determined during the time of sale. In July 2022, bondholders receive a return rate or a bond yield between 3.23% and 3.50%.

4. Treasury inflation-protected securities

Treasury inflation-protected securities (TIPS) are bonds with terms of five, 10, or 30 years. They work much like T-notes and T-bonds, paying interest every six months. They also have a minimum purchase of $100.

However, one factor that makes TIPS stand out is that the amount you invest in them changes in line with inflation, a measure of consumer prices and how they change. Each month, the U.S. Treasury adjusts the amount you invested in TIPS according to the latest changes to the Bureau of Labor Statistics Consumer Price Index (CPI).

This helps investors protect against losing value due to rising consumer prices such as gas, groceries, and rent. However, they might lose value during times of decreasing prices because the amounts invested would decrease with deflation.

What are Treasury securities used for?

The U.S. Department of Treasury uses the securities it issues to borrow money from investors. This money is then used to fund the operations of the U.S. government.

Because the U.S. government backs Treasury securities, they are considered one of the safest investments available to investors. Although inflation and fluctuations in interest rates pose a risk for Treasury securities, there is a low risk of default.

Institutional and individual investors who own stocks and alternative assets use Treasury securities to diversify their investment portfolios. Some investors also use them as fixed-income securities because they pay interest every six months — except T-bills — and provide a predictable return for investors.

Treasury inflation-protected securities (TIPS) could protect against inflation risks and rising consumer prices. This is because the price of TIPS moves in correlation with inflation, so investors feel safer that the money they invest in TIPS won’t lose value due to rising prices.

How to buy Treasury securities

Depending on the type of Treasury security, there are a few different ways you might be able to buy them.

From the U.S. government

All Treasury securities are initially offered at their original price, or face value, on the U.S. Treasury auction website. The website is open to the public, and anyone can purchase securities there. All you have to do is create an account and link your banking information.

Once you create your account, you will find Treasury securities auctions you could participate in. As with any auction, you must place bids on the securities you want to buy.

Through a bank

Several large banks allow you to buy Treasury securities directly on their websites. If your bank or financial institution offers investment products, explore its financial asset options to see whether Treasury securities are one of the investments it offers.

Through a broker

Although you could buy U.S. Treasury securities directly from the government, there is an active secondary market for them.

Security holders who want to cash their Treasury securities out before their maturity date could do so by selling them to a broker or another person. This creates a Treasury security and bond market where people trade the Treasury securities they have.

You might prefer this method if you already have an account with an online broker and don’t want to create a separate account to buy directly from the government.

FAQs about Treasury securities

Bottom line

Treasury securities are generally considered safe-haven assets. However, assets with lower risk levels often have a trade-off of low returns.

Despite the low return, Treasury securities may appeal to people who want fixed income or want to diversify their portfolios with lower-risk investments. To learn more about Treasury securities, visit the U.S. Treasury TreasuryDirect website or purchase them through one of the best brokerage accounts.

FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.