Treasury Bills, Notes, and Bonds: The Complete Investor Guide

The Spectrum of U.S. Government Debt

The U.S. Treasury borrowed $1.83 trillion in fiscal year 2023 alone, financing that debt through auctions of bills, notes, and bonds — each serving a different slice of the yield curve and a different investor need. These are the most liquid, most creditworthy fixed-income instruments in the world, backed by the full faith and taxing power of the U.S. federal government. Understanding the differences between them is the foundation of any fixed-income portfolio.

Treasury securities are direct obligations of the U.S. government — not agencies, not municipalities, not corporations. They carry no credit risk in the traditional sense. The risk is purely duration (interest rate sensitivity) and inflation. In 2023, 10-year Treasury yields reached 5% for the first time since 2007, making them the most closely watched financial benchmark on earth.

Treasury Bills: Short-Term Instruments

Treasury bills (T-bills) have maturities of one year or less and are sold at a discount to face value. An investor buys a $10,000 T-bill for $9,750 and receives $10,000 at maturity. The $250 difference is the interest earned. T-bills do not make coupon payments — all return comes from the price discount.

The 13-week (3-month) T-bill rate serves as the closest approximation to the "risk-free rate" in financial models, including the Capital Asset Pricing Model (CAPM). When the Federal Reserve raises the federal funds rate, T-bill yields rise in near lockstep — making them especially attractive during rate-hiking cycles.

Treasury Notes: The 2- to 10-Year Range

Treasury notes pay a fixed coupon semi-annually and return face value at maturity. They cover the critical intermediate portion of the yield curve. Note maturities:

• 2-year note: Most sensitive to Fed policy expectations; auctioned monthly
• 3-year note: Auctioned monthly; less liquid than 2- and 10-year
• 5-year note: Highly liquid; auctioned monthly
• 7-year note: Auctioned monthly; bridges medium and long-term
• 10-year note: The global benchmark; most widely traded; determines mortgage rates and corporate bond spreads

The 10-year Treasury yield is the single most important interest rate in global finance. When the 10-year yield rises, mortgage rates typically follow (30-year fixed mortgage rates historically run about 170 basis points above the 10-year Treasury). Corporate bonds are priced as a "spread" above the 10-year Treasury, reflecting credit and liquidity risk above the risk-free baseline.

Treasury Bonds: 20 and 30 Years

Treasury bonds extend maturities to 20 and 30 years, making them the most interest-rate-sensitive government instruments. Duration — a measure of price sensitivity to rate changes — runs 15–20 years for 30-year bonds. A 1% rise in yields on a 30-year bond can cause a 15%–20% drop in price. This makes long bonds highly volatile instruments, not conservative ones despite their government backing.

The 20-year Treasury bond was reintroduced in May 2020 after a 34-year absence (the Treasury had stopped issuing 20-year bonds in 1986). It fills a gap in the maturity spectrum and has been particularly attractive to pension funds and insurance companies that need to match ultra-long liabilities with correspondingly long assets.

Buying Through TreasuryDirect vs. the Secondary Market

TreasuryDirect.gov is the U.S. Treasury's direct purchase platform. Retail investors can buy Treasury securities at auction with no brokerage commission, in minimum $100 increments, with a $10 million maximum per auction. Purchases settle automatically; electronic interest payments deposit directly to a linked bank account. The limitation: TreasuryDirect has no ability to sell before maturity without transferring to a brokerage account first — a multi-day process.

The secondary market (through Schwab, Fidelity, TD Ameritrade, or bond desks) offers immediate liquidity and full price transparency. Secondary market Treasuries trade with bid-ask spreads of one-thirty-second to one-sixty-fourth of a point — very tight, but not zero. Buying recently auctioned "on-the-run" Treasuries (the most recent issue of each maturity) minimizes this spread.

State and Local Tax Treatment

Treasury interest is exempt from state and local income taxes — a significant advantage in high-tax states. A California resident in the 9.3% state tax bracket effectively earns 9.3 basis points extra on each percentage point of Treasury yield compared to a CD or corporate bond of equal nominal yield. In New York City, where combined state and city income tax can reach 14.78%, a 5% Treasury yield is equivalent to a 5.87% taxable alternative on a state/local basis. This exemption does not apply to capital gains from selling Treasuries before maturity.

This article is for informational purposes only and does not constitute financial advice.