Treasury securities: Bonds, notes, and bills

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Harvesting reliable yields.

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The United States Treasury has been a mainstay for investors ever since George Washington named Alexander Hamilton to head the new agency in 1789. Today, debt securities issued by the Treasury come in three main forms: Treasury bills, notes, and bonds.

Investors worldwide turn to Treasury securities as one of the safest sources of income, backed by the full faith and credit of the U.S. government. In addition, the income that U.S. investors receive from Treasury securities may be exempt from state and local income taxes, though not federal taxes. With more than $30 trillion in U.S. debt securities outstanding, U.S. Treasurys comprise the largest and most liquid sovereign debt market on earth.

Although Treasury securities tend to offer lower yields than comparable-maturity corporate bonds, they have traditionally been viewed as a reliable asset with little risk of default. As such, they play a role as a long-term, safe asset, although that varies depending on the type of Treasury security. 

Treasury bonds (T-bonds) are long-term debt securities with at-issue maturity of 20 or 30 years. The interest rate, fixed at auction, varies from auction to auction. In the mid-2020s, bond yields hovered between 4% and 5%, but during the COVID-19 recession in 2020, bond yields dropped to near 1%.

Treasury bonds make interest payments to investors every six months until maturity, and the payments from these bonds are exempt from state and local taxes. T-bonds have a long and storied history, with the first of them being designed by Congress at the request of Hamilton to manage the debts incurred by the Continental Congress and the Continental Army during the Revolutionary War.

Treasury notes (T-notes) are U.S. government debt securities with shorter maturities than Treasury bonds—generally between two and 10 years at issue. T-notes typically offer slightly lower yields than Treasury bonds.

Treasury notes are widely held by financial institutions as so-called liquid reserve assets (i.e., assets that hold their value and can be sold quickly when the bank needs to raise cash). The notes also make interest payments to investors every six months until maturity, and the payments from the notes are exempt from state and local taxes.

Treasury bills (T-bills) are short-term U.S. government debt securities with a typical maturity between four weeks and one year. Treasury bills are sold at a discount and pay their full face value at maturity. For example, a T-bill might be quoted at 98.00, meaning 98% of its $1,000 face value (or $980). At maturity, you’d receive $1,000, with the $20 difference representing the interest you earned.

Because of their shorter maturities, investors often use T-bills for cash management. Their prices are also less sensitive to changes in interest rates than longer-term Treasury bonds or notes (what fixed-income pros call duration risk). The yields are sensitive, however, to large purchases or sales by central banks. From 1970 to 1998, the minimum order for Treasury bills was $10,000, after which it was reduced to $1,000 and then to $100.

Treasury bills were first used extensively during World War I, when they were considered an emergency source of federal revenue. Treasury bills are ordinarily held as secondary reserves by commercial banks and by other investors (e.g., margin accounts) as a means of temporarily employing excess funds.

TIPS are a form of government debt security structured to offer a yield that’s responsive to inflation or deflation, as measured by the Consumer Price Index (CPI).

When the index rises, the principal of a TIPS increases by an equivalent percentage. For investors, it offers a government-backed hedge against inflation. A rising principal value has the benefit of higher interest payments, and a larger amount of capital returned to the investor when the security matures.

With TIPS, the principal is indexed to inflation, increasing or decreasing over time, with adjustments applied every six months. In the event of deflation, TIPS have another advantage—the Treasury pays back the greater of either the adjusted principal or the original principal. In a deflationary environment, the main risk is lower interest payments over the life of the security.

Series I bonds and Series EE bonds (once known as Patriot bonds) are government debt securities designed for individual savers rather than institutional investors. Unlike Treasury bills, notes, and bonds, there is no secondary market—you can only buy and redeem them through the U.S. Treasury.

In both cases, you must hold the bonds for at least one year, with a penalty if you redeem them within five years. Interest accrues over time and compounds as it’s added to the bond’s value. Interest is exempt from state and local taxes, and may be free of federal taxes if used for qualified educational expenses.

Series I bonds (I bonds). Like TIPS, I bonds are designed to protect investors from inflation. They offer a fixed interest rate along with an additional variable inflation rate, which the Treasury adjusts twice a year (in May and November) based on recent CPI data. Instead of adjusting the bond’s principal value, inflation is incorporated into the bond’s rate of return.

I bonds earn interest for up to 30 years. Investors can purchase up to $10,000 a year in electronic I bonds, with an additional $5,000 available in paper bonds through a federal tax refund.

Series EE bonds. Series EE bonds are government debt securities that are guaranteed to at least double in value over 20 years, even if the stated interest rate wouldn’t reach that level on its own. They continue to earn interest for up to 30 years.

With a minimum investment of $25 and a maximum purchase cap of $10,000 each calendar year, they are intended for savers rather than institutional investors.

The yield offered by Treasury securities varies and is set through a regular series of auctions open to financial firms and some individuals. Debt issued by the Treasury helps pay for the federal workforce, national defense, social programs, and other government operations.

The U.S. Treasury holds hundreds of auctions each year. Each quarter, the department releases an estimate of how much debt it plans to auction. Yields tend to fall when demand is strong and rise when demand is weaker, because bond prices and yields move in opposite directions. If the government decides it needs to borrow more money than the market expects, that may lead to the Treasury offering higher yields in order to attract buyers.

The auction process includes direct bidders (individuals and institutions) who bid through an automated system run by the Treasury. Indirect investors join the auction through brokers or accounts with the Treasury.

Primary dealers, a special designation set by the Federal Reserve Bank of New York, are required to participate in Treasury auctions and submit bids. The auction allocates securities based on the bids submitted, with primary dealers often purchasing a significant share and then distributing those securities in the secondary market.

In uncertain times, investors want a safe place to keep their money. The one thing that all varieties of Treasury security have in common is that they are backed by the full faith and credit of the United States government.

For many decades, they have been considered among the safest—if not the safest—investments available to global investors. Treasury securities are a staple of trillion-dollar sovereign wealth funds and individual investors alike. They can also be used to help teach basic saving concepts to children.

Safety is why Treasury securities offer lower yields than other kinds of debt, such as corporate bonds and mortgage-backed securities. Each type of Treasury caters to different investor needs—from the inflation concerns of someone saving for retirement, to the investment strategy of an insurance company, to the cash management needs of an international shipping company.

Treasury securities are widely considered among the safest investments in the world, but that safety isn’t absolute. The U.S. national debt has grown significantly over time—exceeding 120% of GDP in the mid-2020s—and the cost of servicing that debt has risen along with it, with interest payments rivaling major categories of federal spending.

Even so, Treasury securities remain a cornerstone of the global financial system. They are held by domestic and foreign investors as well as the Federal Reserve. For investors, they continue to offer stability and liquidity—typically at the cost of lower returns. In other words, they can serve as the stabilizing component of a diversified portfolio, but too much exposure may make it harder to outpace inflation over the long haul.