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A U.S. Treasury bond (often called a T-bond) is a fixed-interest debt security issued by the U.S. Treasury Department to raise funds to finance Uncle Sam’s spending requirements.
Treasury securities vary based on the type of maturity:
- T-bonds: These come with original maturities of either 20 or 30 years and typically offer the highest interest rate for investors. Interest payments are made twice a year.
- T-notes: Original maturities for these securities range from two to 10 years and usually come with lower interest payments than a T-bond. T-note payments are also made twice a year.
- T-bills: These securities have the shortest time to maturity, with lengths ranging from four weeks to one year. T-bills are sold at a discount to the face value of the bond, so investors earn the difference at maturity.
So-called long-term Treasurys, which include the 30-year T-bond and the 10-year T-note, typically offer the highest interest rate payments of any security in the U.S. Treasury fixed-income family. The reason: Longer-term bonds normally have higher yields because they are riskier, as a spike in inflation could reduce the value of the interest payments.
In addition, if market-driven yields move higher, pushing the price of the bond lower, it makes the lower-yielding bond you own a less attractive investment. (However, there are times when shorter-dated securities, such as a 3-month T-bill, can yield more than a 10-year note. This phenomenon, dubbed an inverted yield curve, occurred in 2023.)
How Treasury bonds are structured
Treasury bonds offer investors a basic investment structure, as follows:
- Treasury notes and bonds come with maturities of 10 to 30 years. Both a 10-year and 30-year Treasury hold a minimum face value amount of $1,000, although both are sold in $100 increments if purchased directly from the U.S. Treasury.
- Treasury securities are traded in a highly liquid secondary market, known as the fixed-income market (more commonly known as the bond market.) They can also be purchased directly at TreasuryDirect.com. Investors also can buy Treasury bonds through a bank or broker, but they will likely pay a fee or commission for doing so and may not be able to purchase T-bonds in the smaller $100 allotments offered by the government.
- The term “fixed income” means that Treasury bonds deliver a fixed interest rate payout, paid to investors twice annually, or every six months.
- In addition to the semiannual interest rate payments, bondholders eventually get all of their investment principal back. When a Treasury bond matures – meaning it has reached its maturity date and expires – the investor is paid out the full face value of the bond. That means if the bondholder holds a Treasury bond worth $10,000, he or she will receive the $10,000 principal back, as well as earning interest on the investment.
- Treasury bonds are liquid, meaning they can be sold by bondholders before they mature. Or the bondholder can elect to hang on to the Treasury bond until the bond’s maturity date.
- Bonds, which tend to be less prone to big price swings than stocks, are a great way to keep investment portfolio assets in safety mode, an investment strategy known as capital preservation. Treasury bonds are widely considered a risk-free investment, as they have extremely low odds of default since they are backed fully by the U.S. government.
- Investors should understand that even U.S. government bonds have interest rate risk. That is, if market interest rates rise, the prices of these bonds will fall, as they did throughout 2022.
Treasury bond rates explained
The T-bond’s yield represents the return stemming from an investment in the bond, and is the interest rate the U.S. Treasury pays to investors to borrow their money for a period of time. For instance, an investor who purchases a $10,000 T-bond and earns 4 percent in interest from Uncle Sam will earn a $400 annual return from the Treasury bond purchase.
Treasury bond interest rates (also known as yield) are tied to the specific bond’s maturity date.
“The average [original] maturity date on a Treasury bond is between 10 and 30 years,” says Jacob Dayan, partner at Consumer Law Group in Chicago. “Typically, the longer the maturity date, the higher the interest rate.”
As of August 2023, yields on 30-year U.S. Treasury bonds were around 4.28 percent.
That said, Treasury bond rates do rise and fall for a variety of reasons. “For example, if there is a high demand for longer maturity bonds, the T-bond interest rate could fall to (or below) the level of bonds with shorter maturity dates,” Dayan adds.
T-bond tax implications
Tax-wise, Treasury bonds are fairly straightforward.
Any interest earned on a Treasury bond investment is tax-exempt at the state and local levels, but that interest is taxed by the federal government.
If you hold your Treasury bond with the U.S. government, the amount of interest you earned is easily viewable on your IRS Tax Form 1099. If it’s with your bank or broker, your financial institution can provide your taxable interest earned on your T-bond investment.
How Treasury bonds fit into your portfolio
Above all else, it’s that safe haven feature that primarily creates high demand for Treasury notes and bonds.
“U.S. Treasurys have provided safe haven, diversification and reliable income to generations of investors during most of their 90-year history,” says Craig G. Bolanos, Jr, a founding partner and CEO of Wealth Management Group, LLC, in Inverness, Illinois. “For many investors, U.S. Treasury bonds are the investment of choice for flight to safety (trades) as evidenced most prominently during periods of extreme market volatility.”
Additionally, Treasurys offer several benefits within investment portfolios.
“They serve as an important anchor for risk mitigation,” says Bolanos.
Investors, however, won’t likely get wealthy from investing in T-bonds alone, but they can leverage T-bonds to preserve the wealth already created.
“As an investment possibility, T-bonds are considered one of the safest investments you can make, since they’re backed by the U.S. government,” says Chase Lawson, author of “Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth.”
“T-bonds don’t offer the highest return, as returns typically are around 2 percent to 5 percent, and require putting your money away long term,” says Lawson. “Still, there’s consistent income potential with Treasury bonds and your investment likely won’t decrease if the stock market tanks, like other investment vehicles can do.”
The difference between Treasury bonds and Treasury notes
Treasury bonds are part of a larger federal government family of Treasury securities, comprised of Treasury bonds, Treasury notes and Treasury bills.
“Treasury notes and Treasury bonds are essentially the same type of instrument and only differ in original maturities,” explains Robert R. Johnson, professor of finance at the Heider College of Business, at Creighton University. “Technically, the government only issues Treasury bonds in original 20-to-30-year maturities and it issues Treasury notes in original maturities ranging as short as two years and no longer than 10 years.”
Purchasers of Treasury bonds and notes receive an interest payment every six months, Johnson notes.
Treasury bills (T-bills), the short-term debt of the government, differ from both Treasury bonds and Treasury notes.
“T-bills are issued with original maturities of four, eight, 13, 26, and 52 weeks,” Johnson says. “They don’t pay interest and are issued on a discount basis (which means your initial cost is lower than the face value of the T-bill). With T-bills, the investor receives a higher amount when the bill matures than they paid to acquire it.”
Tips for investing in Treasury bonds
Here are a few easy ways to buy Treasurys:
- Buy direct. If possible, it’s preferable to buy Treasury bonds directly at TreasuryDirect.gov. That way, you’re buying your bonds directly from the federal government and eliminating the fees that come with buying bonds through a middleman, as you would with a brokerage firm.
- Buy closer to retirement. Wealth is more about capital appreciation during the savings and investing years and capital preservation during your later years — and with good reason. When you’re young, investing in higher-risk, but higher-reward stocks generates capital appreciation. In short, you’re creating long-term wealth with your stock investments. However, when you’re either nearing or already in retirement, you want to preserve the wealth you’ve created. You can accomplish that via capital preservation tools like T-bonds, which represent lower-risk investments that reduce your odds of losing money in a market downturn.
- Go the ETF route. An effective, low-cost way to get in on the Treasury bond game is to invest in Treasury ETFs, or exchange traded funds. Any low-cost, diversified Treasury-oriented ETF that emphasizes a long-term T-bond component is worth looking at. You can even mix and match different Treasury security funds without having to pony up the $1,000 minimum needed to buy Treasury bonds from many banks and brokers.
If you’re looking for ETFs that invest in long-term Treasurys, have a look at iShares 20+ Year Treasury Bond ETF (TLT) and Vanguard Long-Term Treasury ETF (VGLT).
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.