U.S. Bonds vs. Bills and Notes: An Overview

According to the U.S. Treasury Department, the selling of national debt to fund operations dates back to the Revolutionary War. The first Treasury Bills hit the market in 1929 followed by the widely popular U.S. savings bonds in 1935 and finally the Treasury notes.  

U.S. savings bonds, U.S. Treasury bills, and notes are all investment products sold by the U.S. government to help finance its operations. The investor effectively loans money to the federal government and earns a profit in return.

Key Takeaways

  • U.S. savings bonds, T-bills, and T-notes are all forms of debt issued by the federal government to help finance its operations.
  • Bonds typically mature in 20-30 years and offer investors the highest interest payments to maturity.
  • T-notes mature anywhere between two and 10 years, with bi-annual interest payments, while T-bills have the shortest maturity terms—from four weeks to a year.
  • These all can be bought and sold in the secondary market, except for savings bond, which are registered to just a single owner.
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The Differences Between Bills, Notes And Bonds

U.S. Savings Bonds

The U.S. savings bond is the old original of savings vehicles for the small American investor, backed by the full faith and credit of the U.S. government.

Unlike the other government debt instruments, savings bonds are registered to a single owner and are not transferable. That is, they cannot be resold. However, they can be inherited, and they can be cashed in early with payment of an interest penalty. 

Savings bonds have not been printed on paper since 2012, and they are no longer sold at banks or post offices. Today, savings bonds can only be purchased online through the TreasuryDirect website.

The most common savings bonds for investors are the Series EE and the Series I bonds. They are an option in some company retirement plans. Series EE bonds can be purchased for as little as $25 or as much as $10,000. They are guaranteed to at least double in value in 20 years and can continue to pay interest for up to 30 years after issuance. 

Series I savings bonds have built-in protection against inflation. They are issued with a fixed rate of return plus a variable inflation rate that is based on the Consumer Price Index (CPI). They also can earn interest for up to 30 years. 

Treasury Bills

The U.S. Treasury bill, or T-bill, is a short-term investment, by definition maturing in one year or less. A T-bill pays no interest but is almost always sold at a discount to its par value or face value. So, the investor pays less than full value up front for the T-bill and gets full value at the maturity date. The difference between the two numbers is the investor's return on the investment.

For example, an investor who purchases a $100 T-bill at a discount price of $97 will receive the $100 face value at maturity. The $3 difference represents the return on the security.

Treasury bills can be bought through a bank or broker, or at the TreasuryDirect.gov website. Because of their short-term and nearly risk-free nature, T-bills are among the safest, most liquid securities in the world and form the foundation of several important markets such as the overnight interbank repo market, money market funds, and the commercial paper market.

Treasury Notes

Treasury notes, called T-notes, are similar to Treasury bonds but they are short-term rather than long-term investments. T-notes are issued in $100 increments in terms of two, three, five, seven, and 10 years. The investor is paid a fixed rate of interest twice a year until the maturity date of the note.

Treasury notes are sold at a government auction. The buyer may enter a competitive bid, specifying a yield, or a non-competitive bid, agreeing to buy at the yield determined by auction.

Like T-bills, T-notes can be bought through a bank, a broker, or the TreasuryDirect.gov website.

Government Bond Yields

For the individual investor, U.S. government debt represents a safe investment with a modest return. In fact, these bonds are considered to be among the safest investments in the world, and as a result carry quite modest yields for investors -- with short-term T-bills earning only the risk-free rate of return.

The U.S. government has never defaulted on any of its bond obligations.

Here are some sample rates:

  • Series I bonds purchased through October 1, 2020 will pay 1.06%, down 0.20% from the previous six-month period. 
  • A 91-day T-bill was selling at auction at an average discount of 0.13% as of May 13, 2020. It was 2.36% one year earlier.