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

The federal government offers three categories of fixed-income securities to consumers and investors to fund its operations: Treasury bonds, Treasury notes, and Treasury bills. Each security has a different rate at which it matures, and each pays interest in a different way.

One thing they all have in common, though, is their reputation of being based on the full faith and credit of the United States government. Investors can expect a high degree of safety and a steady, but unspectacular profit from each of these securities. Upon maturity, these bonds, notes, and bills return their face value.

The returns on all three of these U.S. debt securities fell after the financial crisis of 2008 and did not fully recover until the fall of 2018.

Many investors use government-issued fixed-income securities to save for retirement or for educational purposes.

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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. They are offered to investors in a term of 30 years to maturity.

Purchasers of T-bonds receive a fixed-interest payment every six months. They pay the highest interest rates of the three types of government securities because they require the longest term of the investment. 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.

Individual investors often use T-notes to keep a portion of their retirement savings risk-free, to provide a steady income in retirement, or to set aside savings for a child's education or other major expenses. Investors must hold their T-bonds for a minimum of 45 days before they can be sold on the secondary market.

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The approximate amount at which the T-bond was trading at as of Jan. 30, 2019.

Treasury Notes

Also known as T-notes, treasury notes, are similar to T-bonds, but are offered in a wide range of terms as short as two years and no longer than 10 years. T-notes also generate interest payments twice a year. But because the terms offered by T-notes are lower than T-bonds, they offer lower yields.

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.

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.

As of Jan. 30, 2019, the two-year T-note was trading at around 2.5%.

Treasury Bills

Treasury bills, or T-bills, have the shortest terms of all. They're issued with maturity dates set at four, eight, 13, 26, and 52 weeks.

T-bills are auctioned off to investors at a discount to par or face value. The investor's return is the difference between the par value and the discount price paid at purchase.

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, though, is that a CMB has a much shorter maturity date, ranging anywhere between seven days to three months. These can also be purchased in $100 increments.

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 makes a list of upcoming auctions. Individual investors can purchase securities directly through the auction process, or through a broker or bank.

Auctions are announced several days before they actually 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. Just 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.

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

Special Considerations: 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 the TreasuryDirect website.

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 30 years and offer investors 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 a year.
  • These investments are auctioned off regularly on the U.S. Treasury's website.