Treasury Bonds, Notes, & Bills Explained In This Handbook

By Yashovardhan Sharma

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The federal government provides fixed-income securities to consumers and investors as a means to finance its operations. These securities encompass Treasury bonds, Treasury notes, and Treasury bills. Treasuries serve as debt instruments, with investors essentially loaning the U.S. government the amount used to purchase the bond. In return, investors receive interest or a rate of return, and upon the bond's maturity, they are reimbursed the bond's face value. While Treasury bonds, notes, and bills have varying maturity dates and interest payment methods, all Treasuries share a common feature of zero default risk, backed by the full faith and credit of the United States government. However, the security provided by Treasuries comes at the cost of a lower return on investment compared to riskier alternatives, such as corporate bonds.


Treasury Bills vs Bonds vs Notes

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Treasury Bill is a Short-Term Debt Obligation


It is a short-term debt obligation, essentially a brief loan, issued by the federal government. These bills mature in one year or less from the purchase date, ensuring repayment of the borrowed amount plus interest within 12 months. Due to their short terms and lower risk, as they are backed by the U.S. government, T-bills generally offer lower returns compared to stocks or even many corporate or municipal bonds. When purchasing a T-bill, you pay less than its face value and receive the face value upon maturity. The interest payments on the bill are only disbursed at the end of the term, unlike many other bonds.


Consequently, selling Treasury bills before maturity may not result in recouping the full face value. Investors have the option to retain a T-bill until maturity or sell it on the secondary market before then. While interest earned on a T-bill is subject to federal taxes, it is not subject to state or local income taxes. The short-term nature and high liquidity of Treasury bills make them attractive to certain investors. Despite typically offering lower returns than Treasury bonds or notes, T-bills can outpace the returns of a basic savings account, given their perceived safety and consistent demand. It can help to navigate uncertainties in the short term in the financial markets.


Treasury bond is an Extended-Term Debt Obligation


Treasury bonds, also known as T-bonds, are extended-term debt obligations maturing over periods of 20 or 30 years. They represent the longest-term investments and typically offer the highest yields among T-bills, T-bonds, and Treasury notes. However, this is not an absolute rule, as an inverted yield curve can lead to shorter-term Treasuries having higher yields than their longer-term counterparts. In the realm of T-bonds, the interest rate remains fixed for the entire term. If purchased at less than the face value (par value) on the secondary market, the actual yield may surpass the stated interest rate. T-bonds pay interest every six months until either the bond is sold or it reaches maturity, at which point the investor receives the bond's face value.


While selling a T-bond before maturity is possible, there's a risk of financial loss, as selling it for face value is not guaranteed. It's crucial to distinguish Treasury bonds from U.S. savings bonds, which include EE bonds, I bonds, and HH bonds (discontinued after 2004; maturing in 2024 with a 20-year lifespan). A popular type of treasury bond is treasury inflation protection securities.


Treasury Notes Have Medium Term Debt Obligations


Now, let's delve into Treasury notes. Similar to T-bills and T-bonds, Treasury notes are secure, highly liquid fixed-income investments, backed by the U.S. government. However, their maturities and interest rates fall between those of T-bills and T-bonds. Treasury notes, or T-notes, pay interest every six months until maturity. Typically, they offer lower interest rates than T-bonds due to their shorter maturities. Similar to T-bonds, the yield is determined at auction, and upon maturity, Treasury notes pay the face value of the bond. U.S. Treasury auctions facilitate the sale of Treasury notes in $100 increments, and the note's price may fluctuate based on auction results, potentially equal to, less than, or greater than the face value. Investors can choose to hold T-notes until maturity or sell them in the secondary market before maturity, with redemption options akin to those of Treasury bonds.


Process to Acquire Treasury Bills, Bonds, and Notes


There are two primary avenues for obtaining Treasuries: through new-issue offerings sold at auctions or by engaging in secondary market transactions where previously purchased securities are resold. The U.S. government conducts auctions at intervals, providing advance details such as the type of security, quantity available, and maturity date. Investors can procure new-issue and secondary market Treasury bills, bonds, and notes through banks, dealers, or brokers. Typically, a minimum purchase amount and incremental purchase requirements are in place. For instance, at Fidelity, where the minimum purchase is $1,000 with incremental purchases of $1,000, new-issue auctions are usually announced a few days before the auction date, while secondary market Treasurys are tradable during bond market hours.


Another option is to directly purchase new issues from the U.S. government by establishing an account at TreasuryDirect. The minimum purchase here is $100, with incremental purchases of $100 allowed. Investors have the flexibility to retain a Treasury security until maturity or sell it before that point. However, selling a security held in a TreasuryDirect account requires a minimum holding period of 45 days before transferring it to a bank, broker, or dealer. T-bills in this type of account lack a secondary market as their terms are shorter than the minimum holding period.


Role of Treasury Bills, Bonds, or Notes in an Investment Portfolio


These securities, known for their safety and predictable returns, can offer several advantages in an investment portfolio. Potential scenarios where Treasurys may be a prudent choice include:

  1. Generating retirement income: For investors seeking consistent income and principal safety, Treasurys can provide a reliable stream of interest payments as conservative investments.
  2. Mitigating portfolio volatility: Including Treasurys in the fixed income portion of a portfolio may help counterbalance the more volatile price movements of equity holdings.
  3. Building bond ladders for steady income: Given the varied maturities of Treasurys, investors can construct bond ladders to achieve a consistent and reliable income stream.




Understanding the dynamics of Treasury bonds, notes, and bills is essential for investors looking to navigate the world of fixed-income securities. Treasury securities, issued by the U.S. government, offer a range of options with varying maturities and characteristics. As with any financial decision, it's important for investors to carefully assess their goals, risk tolerance, and time horizon when incorporating these instruments into their portfolios.