Government-issued fixed income securities might not sound as exciting as tech stocks and cryptocurrency. However, they could offer stability to a well-rounded portfolio. Before purchasing, it helps to know how Treasury bills, Treasury bonds, and Treasury notes work generally—and how they could work within an investment strategy.
What is a Treasury bill?
A Treasury bill—also called a T-bill—is a short-term debt obligation (essentially a short-term loan) issued by the federal government. These bills mature in one year or less from the date of purchase. This means you will see repayment of the amount borrowed plus interest within 12 months. Due to their short terms and lower risk (because they're backed by the US government), T-bills tend to offer lower returns compared to stocks or even many corporate or municipal bonds.
When you buy a T-bill, you pay less than its face value and then receive the bill's face value when it matures. This represents the bill's "interest" payments and is only paid out at the end of the term, not regularly, unlike many other bonds. Therefore, you won't recoup the full face value if you sell your Treasury bills before maturity.
You can keep a T-bill until it matures or sell it before then on the secondary market. Interest earned on a T-bill is subject to federal taxes but not state or local income taxes.
Their short-term nature and high liquidity make Treasury bills appealing to some investors. Since these investments are often viewed as relatively safe, demand is generally consistent. And though they usually offer lower returns than Treasury bonds or notes, this may not always be the case. For most of 2023 and into 2024, short-term Treasurys have yielded more than medium- and long-term Treasurys—aka an inverted yield curve.
| A quick look at Treasury bills | |||||
| Maturities available | When interest is paid | How interest is taxed | Liquidity | Volatility | Typical returns compared to Treasury bonds and notes |
|---|---|---|---|---|---|
| 4, 8, 13, 17, 26, and 52 weeks | At maturity | Income exempt from state and local taxation; federal tax due on interest earned. | High | Low | Lower |
What is a Treasury bond?
Treasury bonds—also called T-bonds—are long-term debt obligations that mature in terms of 20 or 30 years. They're essentially the opposite of T-bills as they're the longest-term and typically the highest-yielding among T-bills, T-bonds, and Treasury notes. "Typically" because this isn't always the case. When there's an inverted yield curve, yields on Treasuries with shorter maturities can be higher than on those with longer maturities.
With T-bonds, your interest rate is fixed for the bond's entire term. However, your actual yield might be higher than its interest rate if you purchase the bond at less than par, or face, value on the secondary market.
T-bonds pay interest every 6 months until you sell the bond or it matures, at which point you'll receive the bond's face value. It's possible to sell a T-bond before maturity, but you could lose money as there's no guarantee you can sell it for face value.
Note that Treasury bonds aren't the same as US savings bonds, which include EE bonds, I bonds, and HH bonds (no longer issued after 2004; with a 20-year life, they mature in 2024).
| A quick look at Treasury bonds | |||||
| Maturities available | When interest is paid | How interest is taxed | Liquidity | Volatility | Typical returns compared to Treasury bills and notes |
|---|---|---|---|---|---|
| 20 or 30 years | Every 6 months | Income exempt from state and local taxation; federal tax due each year on interest earned. | High | Medium-High | Higher |
What is a Treasury note?
Like T-bills and T-bonds, Treasury notes are generally considered to be below-risk and highly liquid fixed-income investments, backed by the US government.
| A quick look at Treasury notes | |||||
| Maturities available | When interest is paid | How interest is taxed | Liquidity | Volatility | Typical returns compared to Treasury bills and bonds |
|---|---|---|---|---|---|
| 2, 3, 5, 7, or 10 years | Every 6 months | Income exempt from state and local taxation; federal tax due each year on interest earned. | High | Medium | Moderate |
Treasury bills vs. bonds vs. notes side by side
Now that you have the basics on these 3 types of government securities, let's see how they stack up side by side.
| Treasury bills vs. Treasury bonds vs. Treasury notes | |||
| Treasury bills | Treasury bonds | Treasury notes | |
|---|---|---|---|
| Maturities available | 4, 8, 13, 17, 26, and 52 weeks | 20 or 30 years | 2, 3, 5, 7, or 10 years |
| When interest is paid | At maturity | Every 6 months | Every 6 months |
| How interest is taxed | Income exempt from state and local taxation; federal tax due on interest earned. | Income exempt from state and local taxation; federal tax due each year on interest earned. | Income exempt from state and local taxation; federal tax due each year on interest earned. |
| Liquidity | High | High | High |
| Volatility | Low | Medium | Medium-High |
How might Treasury bills, bonds, or notes fit into an investment portfolio?
With their relative safety and predictable returns, Treasurys could offer some advantages to an investment portfolio. Situations where these securities might make sense include:
- Generating retirement income. For income-minded investors, Treasurys could offer the safety of principal and steady interest payments.
- Mitigating portfolio volatility. Adding Treasurys to the fixed income portion of your portfolio could potentially help offset more volatile price movements in equity holdings.
- Building bond ladders for steady income. Because Treasurys come in varying maturities, you can ladder them to deliver reliable income.
How do you buy Treasury bills, bonds, and notes?
There are 2 ways to buy Treasurys, which are either new-issue offerings sold at auction or secondary market offerings, or those being resold. The US government holds auctions at various intervals and will announce information like what security they're auctioning, how many are available, and maturity date beforehand.
You can buy new-issue offerings and secondary market Treasury bills, bonds and notes through a bank, dealer, or broker. In general, they require a minimum purchase with minimum incremental purchases. For example, at Fidelity, where the minimum purchase is $1,000 with incremental purchases of $1,000, investors typically will see new-issue auctions posted a few days ahead of their auction date while secondary market Treasurys may be bought and sold when bond markets are open.
You can also buy new-issues directly from the US government by opening an account at TreasuryDirect. The minimum purchase is $100, with incremental purchases of $100. You can keep a Treasury security until it matures or sell it before then. To sell a security held in a TreasuryDirect account, you must hang on to it for at least 45 days before transferring it to a bank, broker, or dealer. T-bills in this type of account don't have a secondary market because their terms are less than the minimum holding period.