The U.S. Treasury market plays an important role in government financing and the broader financial system. Treasury securities allow the federal government to borrow money from investors, while providing buyers with debt instruments that have defined payment and maturity terms.
For individual investors, Treasury bills, notes, and bonds offer different time horizons and payment structures. Understanding those differences is essential before choosing a security.
Treasury bills: Shorter maturities
Treasury bills are short-term securities that mature in one year or less. They are generally sold at a discount or at face value. When a bill matures, the investor receives its face value. The difference between the purchase price and the amount received at maturity represents the return.
Treasury bills do not make regular interest payments during their term.
Treasury notes: Medium-term borrowing
Treasury notes have maturities ranging from two to ten years. They pay a fixed rate of interest every six months until maturity.
An investor who holds a note until maturity receives the principal amount, subject to the terms of the security. If the investor sells before maturity, the market price may be higher or lower than the purchase price.
Treasury bonds: Longer-term securities
Treasury bonds have maturities longer than ten years. Like notes, they generally pay fixed interest every six months. Their longer maturity can make their market prices more sensitive to changes in interest rates.
Buying at auction or in the secondary market
Individual investors may buy Treasury marketable securities through TreasuryDirect or through a bank, broker, or dealer. TreasuryDirect allows noncompetitive bids for eligible auctions, while brokers and dealers may provide access to both competitive and noncompetitive bidding.
Investors should understand how auction pricing works and how the security can be sold before maturity. A Treasury security's market value can change as interest rates and market conditions change.
Taxes and investment objectives
Interest from Treasury securities is generally subject to federal income tax but exempt from state and local income taxes. Investors should check the tax treatment and reporting requirements that apply to their situation.
Treasury securities are not interchangeable with bank savings accounts. Their maturity, pricing, liquidity, and interest-payment structures differ.
Bottom line: Treasury bills, notes, and bonds provide different ways to lend money to the U.S. government. Investors should compare maturity, payment structure, tax treatment, and the possibility of price changes before purchasing.
This article is for educational purposes and is not individualized investment or tax advice.
