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What Are Treasury Notes?
Issuing bonds is one way for a corporation or federal government to raise money. Bonds are known as fixed-income securities because they pay the bondholder a fixed sum at a regular interval. The United States Treasury issues several categories of bonds to investors, with timeframes ranging from just a few months to 30 years long. In return for their investment, the Treasury pays the investor back the principal, or face value, of the bond along with interest, known as the yield.
Treasury notes are intermediate-term bonds. Shorter-maturity bonds, such as Treasury bills, don’t offer a yield payout and instead sell at a discount. Longer-term bonds, such as T-bonds, usually have the greatest yields, although they are also most susceptible to interest rate risk, which is illustrated by their higher bond duration.
How Do Treasury Notes Compare with Other Treasury Securities?
There are four categories of Treasury securities:
- T-bills: Treasury bills (T-bills) mature in 1 year or less and do not offer a yield. For this reason, they are also known as zero-coupon bonds. Unlike other Treasury securities, these bonds trade at a discount, which means that their income is generated by issuing the bond at a discounted price compared to its face value.
- T-notes: Treasury notes (T-notes) mature in 2, 3, 5, 7, or 10 years. They make interest payments twice a year, at a fixed rate, which does not change.
- T-bonds: Treasury bonds (T-bonds) mature in 20 or 30 years. These are the longest-term bonds and usually sport the highest yields. They also display the most volatility.
- TIPS: The principal of Treasury Inflation Protected Securities, or TIPS, is indexed to the rate of inflation on a daily basis as measured by the Consumer Price Index (CPI). In environments of high inflation, these bonds are worth more; when there’s deflation, they are worth less. TIPS also offer a yield.
What Is the Treasury Note Rate? When Is Interest Paid?
Treasury notes make interest payments twice a year. Their yields are set at Treasury auctions, which are open to the public. The U.S. Treasury publicizes the dates of the auctions and the details of the Treasury issues, including the amount available for purchase as well as their maturity date.
During these auctions, buyers can place two kinds of bids:
- Competitive bids, which allow the buyer to determine the yield they will accept and
- Noncompetitive bids, where buyers accept yields determined by auction prices.
All Treasury notes with the exception of the 10-Year Treasury are auctioned monthly. The 10-Year Treasury is auctioned quarterly: in February, May, August and November. Reopenings take place during the rest of the year, although the issue date and purchase price may vary.
The yield rates resulting from the auctions are posted on the TreasuryDirect website. Investors can also view details about upcoming auctions on the TreasuryDirect website.
Post-auction, all bidders receive the same yield.
How Do I Buy Treasury Notes?
The great news about Treasury notes is that you don’t need to wait until a Treasury auction to purchase them.
- Noncompetitive bids are sold all the time on the TreasuryDirect website or through a bank or broker.
- Investors can also set up a competitive bid through the TreasuryDirect website. They are available through brokers and banks as well, but it’s important to remember that depending on what yield is set at auction, you might not get the Treasury note of your choice at the price you desire.
Treasury notes can be purchased in multiples of $100.
T-notes are also available as part of bond ETFs or through money market accounts. Investors can also buy Treasury notes through a broker on the secondary market, and who purchase them this way are able to hold them in a retirement account, like an IRA.
How Do I Sell Treasury Notes?
If an investor holds a Treasury note until maturity, they can redeem it for cash at face value. TreasuryDirect account holders can have the funds automatically deposited into their bank accounts or reinvested into another Treasury security.
Investors who wish to sell their T-notes prior to maturity can do so through their bank or broker, but they may not be able to sell them at face value. In addition, they must hold the security for at least 45 days.
When Do Treasury Notes Mature?
Depending on their maturity term, Treasury notes mature between 1 year and 10 years from their issue date.
What Is a 10-Year Treasury Note? Why Is It Important?
The 10-year Treasury is the most widely quoted Treasury note. Banks use it as a benchmark for calculating mortgage rates.
The 10-Year Treasury, along with the 2-Yield Treasury, are used when calculating the slope of the yield curve, which is an important economic indicator. Usually, longer-term bonds have higher yields than shorter-term bonds; when they invert, and yields on the shorter-term Treasury outpace the longer-term Treasury, investors consider this to be a sign of economic instability, one which could likely forespell recession.
What Are Some Important Features of Treasury Notes?
Investors find Treasury notes to be attractive investments because they help reduce risk in your overall portfolio, especially in times of market volatility. They are backed by the “full faith and credit” of the U.S. government, so they are virtually guaranteed never to default. They also provide safe and regular interest payments and are considered to be liquid investments, which means they can convert easily to cash.
Are U.S. Treasury Notes Taxable?
Yes, interest earned on Treasury notes is taxable at the federal level, but not at the state or local levels. Fill out and submit form 1099-INT.
Are Treasury Notes a Good Investment? Is Now a Good Time to Buy Treasury Notes?
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