What Is a Treasury Bond (T-Bond)?

Treasury bonds (T-bonds) are government debt securities issued by the federal government that have maturities greater than 10 years. T-bonds earn periodic interest until maturity, at which point the owner is also paid a par amount equal to the principal. Treasury bonds are part of the larger category of U.S. sovereign debt known collectively as treasuries, which are typically regarded as virtually risk-free since they are backed by the U.S. government's ability to tax.

Key Takeaways

  • Treasury bonds (T-bonds) are fixed-rate U.S. government debt securities with a maturity range between 10 and 30 years.
  • T-bonds pay semiannual interest payments until maturity, at which point the face value of the bond is paid to the owner.
  • Along with Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities (TIPS), Treasury bonds are one of four virtually risk-free government-issued securities.

Treasury Bond

Understanding T-Bonds

Treasury bonds (T-bonds) are one of four types of debt issued by the U.S. Department of the Treasury to finance the government’s spending activities. The four types of debt are Treasury bills, Treasury notes, Treasury bonds and Treasury Inflation-Protected Securities (TIPS). The securities vary by maturity and coupon payments. All of them are considered benchmarks to their comparable fixed-income categories since they are virtually risk-free, backed by the U.S. government, which can raise taxes and increase revenue to ensure full payments. These investments are also considered benchmarks in their respective fixed-income categories because they offer a base risk-free rate of investment with the categories' lowest return. T-bonds have long durations, issued with maturities of between 10 and 30 years.

As is true for other government bonds, Treasury bonds make interest payments semiannually, and the income received is only taxed at the federal level. T-bonds are known in the market as primarily risk-free; they are issued by the U.S. government with very little risk of default. Treasury bonds are issued at monthly online auctions held directly by the U.S. Treasury. 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-bonds 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.

Treasury Bond Maturity Ranges

Treasury bonds are issued with maturities that can range from 10 to 30 years. They are issued with a minimum denomination of $1,000, and coupon payments on the bonds are paid semiannually. The bonds are initially sold through auction in which the maximum purchase amount is $5 million if the bid is noncompetitive or 35% of the offering if the bid is competitive. A competitive bid states the rate the bidder is willing to accept; it is accepted depending on how it compares with the set rate of the bond. A noncompetitive bid ensures the bidder gets the bond, but he has to accept the set rate. After the auction, the bonds can be sold in the secondary market.

The Treasury Bond Secondary Market

There is an active secondary market for Treasury bonds, making the investments highly liquid. The secondary market also makes the price of Treasury bonds fluctuate considerably on the trading market. As such, current auction and yield rates of Treasury bonds dictate their pricing levels on the secondary market. Similar to other types of bonds, Treasury bonds on the secondary market see prices go down when auction rates increase, as the value of the bond’s future cash flows is discounted at the higher rate. Inversely, when prices increase, auction rate yields decrease.

Treasury Bond Yields

In the fixed-income market, Treasury bond yields help to form the yield curve, which includes the full range of investments offered by the U.S. government. The yield curve diagrams yields by maturity and is most often upward sloping, with lower maturities offering lower rates than longer-dated maturities. However, when longer maturities are in high demand, the yield curve can be inverted, which shows longer maturities with rates lower than shorter-term maturities.