Loading the player...

What is a 'Treasury Note'

A treasury note is a marketable U.S. government debt security with a fixed interest rate and a maturity between one and 10 years. Treasury notes are available from the government with either a competitive or noncompetitive bid. With a competitive bid, investors specify the yield they want, at the risk that their bid may not be approved; with a noncompetitive bid, investors accept whatever yield is determined at auction.

BREAKING DOWN 'Treasury Note'

Treasury notes are extremely popular investments, as there is a large secondary market that adds to their liquidity. Interest payments on the notes are made every six months until maturity. The income for interest payments is not taxable on a municipal or state level but is federally taxed, similar to the Treasury bond. The only difference between a Treasury note and bond is the length of maturity. A Treasury bond’s maturity can last from 10 to 30 years, making Treasury bonds the longest-dated, sovereign fixed-income security.

Interest Rate Risk

The longer the maturity, the higher the note’s or bond’s exposure to interest rate risks. In addition to credit strength, a note/bond’s value is determined by its sensitivity to changes in interest rates. Most commonly, a change in rates occurs at the absolute level underneath the control of a central bank or within the shape of the yield curve.

Duration

A good example of an absolute shift in interest rates occurred in December 2015 when the Federal Reserve (Fed) raised the federal funds rate range by 25 basis points to 0.25 to 0.50%. This increase in benchmark interest rates has had the effect of decreasing the price of all outstanding U.S. Treasury notes and bonds. Moreover, these fixed-income instruments possess differing levels of sensitivity to changes in rates, which means that the fall in prices occurred at various magnitudes. This sensitivity to shifts in rates is measured by duration and expressed in terms of years. Factors that are used to calculate duration include coupon, yield, present value, final maturity and call features.

Shifts in the Yield Curve

In addition to the benchmark interest rate, elements such as changing investors’ expectations create shifts in the yield curve, known as yield curve risk. This risk is associated with either a steepening or flattening of the yield curve, a result of altering yields among similar bonds of different maturities. For example, in the case of a steepening curve, the spread between short- and long-term interest rates widens. Thus, the price of long-term notes decreases relative to short-term notes. The opposite occurs in the case of a flattening yield curve. The spread narrows and the price of short-term notes decrease relative to long-term notes.

RELATED TERMS
  1. Curve Steepener Trade

    Curve steepener trade is a strategy that uses derivatives to ...
  2. Treasury Index

    The Treasury index is based on the U.S. Treasury's daily yield ...
  3. Flat Yield Curve

    The flat yield curve is a yield curve in which there is little ...
  4. Spot Rate Treasury Curve

    The spot rate treasury curve is a yield curve constructed using ...
  5. Government Paper

    Government Paper are debt securities that are issued or guaranteed ...
  6. Positive Butterfly

    A positive butterfly is a non-parallel yield curve shift in which ...
Related Articles
  1. Investing

    Bond yield curve holds predictive powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  2. Investing

    The Importance Of U.S. Treasury Rates

    U.S. Treasury bond interest rates affect more than just bondholders! It impacts the day to day lives of all consumers.
  3. Investing

    Introduction to Treasury Securities

    Purchasing Treasury securities backed by the U.S. government and knowing their characteristics can provide a steady guaranteed income and peace of mind.
  4. Investing

    3 Best Bond Strategies in a Rising-Rate Environment

    Find out which bond strategies offer the best protection and investment return during the Federal Reserve's monetary tightening cycle.
  5. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  6. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  7. Investing

    IEI: iShares 3-7 Year Treasury Bond ETF

    Take a closer look at the iShares 3-7 Year Treasury Bond ETF, which is a BlackRock issue focused on intermediate maturity government bonds.
  8. Investing

    The 3 Largest U.S. Government ETFs (TIP, SHY)

    Learn about the benefits of U.S. government ETFs, and explore the three largest government funds available on the market as of March 2016.
  9. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  10. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
RELATED FAQS
  1. Which economic factors impact Treasury yields?

    Learn about the economic factors that impact Treasury yields. These yields are the benchmark yield for debt notes around ... Read Answer >>
  2. What does market segmentation theory assume about interest rates?

    Learn how the market segmentation theory for different maturities of interest rates seeks to describe the shape of the yield ... Read Answer >>
Trading Center