Treasury Bonds vs. Treasury Notes vs. Treasury Bills: What’s the Difference?

The federal government sells fixed-income securities, including Treasury bonds, Treasury notes, and Treasury bills, prized by conservative investors for their low risk and predictable income. Treasury bonds are long-term government securities with a maturity period of more than 10 years, and you get twice-yearly interest payments and the bond’s face value at maturity. Treasury notes are medium-term, ranging from two to 10 years, and are otherwise the same, with semiannual interest payments and the face value when they mature. Treasury bills mature within a year, do not pay interest, and are sold at a discount to the face value that you get at maturity.

Despite their reputation as conservative, not-very-exciting investments, Treasurys are a major pillar of the world’s economy. Treasury bonds, notes, and bills are crucial for both the government and investors. For the federal government, they are a means of raising funds to cover public expenses and manage the national debt. For investors, they are a low-risk investment option—a calm port among the market’s often roaring tides—and provide a safe way to earn interest and diversify investment portfolios. But this is also the case for people, institutions, and governments the world over, meaning they don’t just provide stability to U.S. investors but to markets worldwide.

Treasury bonds, notes, and bills have different maturity dates and pay different amounts of interest (usually, the longer the term, the more interest). However, all Treasurys are treated as having no risk of default, since they are guaranteed by the U.S. government. Essentially, if the U.S. government stops paying its debts, the economic shock would make Treasurys the least of your worries. The safety they afford means that Treasurys have a lower potential return than alternative, riskier investments like stocks or corporate bonds.

Treasury yields rise and fall, depending on the market and economic conditions. For example, yields fell significantly during the COVID-19 pandemic in 2020. Beginning in October 2022, the yield curve for Treasurys inverted, meaning that shorter-term Treasurys offer higher rates than longer-term ones. More typically, investors want more interest the longer they are parking their capital. Since the 1950s, inverted yield curves have been a perilous sign, all but assuring a rocky economic road ahead, often with a recession about 12 to 18 months away. The early 2020s inverted yield curve, though, is more a result of the Federal Reserve’s actions than anything else. To stave off inflation, in 2021 and 2022, the Fed began raising the federal funds rate sharply, moving from almost 0% at the beginning of 2022 to 5.5% in mid-2023. Shorter-term interest rates on T-bills reacted quickly, and since longer-term bonds didn’t rise as much so fast, an inverted yield curve was the result.

As of early 2024, one-month T-bills were offering 5.54%, one-year Treasurys were at 4.75%, 10-year T-notes were at 4.14%, and the 30-year T-bonds were at 4.38%.

Treasury Bonds

Treasury bonds are often called long bonds because they take the most time to mature out of government-issued securities. They are offered at 20 or 30 years to maturity.

Features of Treasury bonds

Once you buy T-bonds, you get a fixed-interest payment called the coupon every six months. The coupon amount is given as a percentage of the bond’s face value. For example, a bond worth $500 with a coupon rate of 5% would pay $25 in interest each year.

At maturity, you’re paid the bond’s face value. When you redeem bonds with a TreasuryDirect account at maturity, the proceeds are deposited automatically into the bank account on file. Compared with Treasury notes and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.

You can wait to redeem your T-bond until it matures or sell it in the secondary market. However, you must first wait at least 45 days. After that, you’re unlikely to get the face value if you sell it before maturity, so you could see a loss between what you paid initially and what you get selling it.

Treasury bonds are sold at monthly online auctions at TreasuryDirect, the U.S. Treasury’s securities platform. Sold in multiples of $100, their prices and yields are decided during the auction. T-bonds are also traded in the secondary market and can be bought from a bank or broker.

Retail investors typically use T-bonds to keep part of their savings risk-free and to receive a steady income during retirement. Treasury bonds can also be used as savings for education or other major expenses. Retail and institutional investors buy Treasury bonds to diversify since they are low-risk, decrease the overall volatility of a portfolio, and provide a steady income stream.

Treasury Notes

Treasury notes are like Treasury bonds but have shorter terms, like two, three, five, seven, and 10 years. Like T-bonds, Treasury notes are backed by the U.S. government.

Features of Treasury notes

Treasury notes pay interest every six months until they mature. Typically, Treasury notes pay less interest than T-bonds since T-notes have shorter maturities. Like T-bonds, the yield is determined at auction, and upon maturity, you get the face value of the bond.

T-notes are also auctioned by the U.S. Treasury and sold in $100 increments. The price of the note can change based on the auction results. It can be less than, more than, or equal to the note’s face value.

You can redeem them the same way as Treasury bonds, and T-notes, too, can be held until maturity or sold in the secondary market before they mature.

Why Treasury notes are important

The 10-year T-note is the most closely watched government bond. It is used as a benchmark rate for banks to calculate mortgage rates. Typically, the 10-year note is in high demand since it’s often used to lower the volatility of an investment portfolio.

During a recession and when there’s market uncertainty, demand for the 10-year notes might increase significantly, leading to major changes in its prices and yields. Meanwhile, when the economy is expanding, investors might sell their 10-year notes to have funds for higher-yielding bonds and other investments since there’s a reduced risk of loss at those times.

Since the 10-year note is very popular with institutional and retail investors, central banks, and governments, it always has steady demand. This means it has excellent liquidity should you need to sell it before maturity.

Treasury Bills

Treasury bills, or T-bills, have the shortest terms of all and are issued with maturity dates of four, eight, 13, 26, and 52 weeks.

Features of Treasury bills

Unlike Treasury bonds and notes, T-bills do not pay interest. Hence, they’re call zero-coupon bonds. Instead, Treasury bills are auctioned off to investors at a discount to their face value. Your return, then, is the difference between the face value and the discounted price you initially paid.

Suppose you buy a Treasury bill with a $1,000 face value for $950. At maturity, you will be paid $1,000. The $50 difference between the $950 purchase price and the $1,000 face value is considered the interest.

Like Treasury bonds and notes, T-bills have no default risk since they’re backed by the U.S. government. As a result, T-bills tend to pay less interest than corporate bonds since corporate bonds have the potential of defaulting, which leads investors to demand more interest to compensate them for the added risk of investing in them. When they mature, the process for redeeming them is the same as the others.

Cash management bill (CMB)

The U.S. Treasury also offers a short-term security that is like the T-bill called a cash management bill (CMB). The main difference between the two is that a CMB has a much shorter maturity date, ranging anywhere between seven days to three months. CMBs are bought in $100 increments.

Treasury Auctions

Treasury bonds, notes, and bills are sold through U.S. Treasury auctions on the TreasuryDirect platform. The demand for them helps set the rates and yields during the auctions, which can change based on interest rate changes and other market factors. 

All auctions are open to the public and can be found on the Treasury’s list of upcoming auctions at TreasuryDirect. You can buy securities directly through one of these auctions or your bank or broker.

Auctions are announced several days ahead, with the amount to be auctioned and the maturity date. There are three ways bidding happens:

• Competitive bids: You set the acceptable rate, yield, or discount margin. Competitive bids are limited to 35% of the offering amount.
• Noncompetitive bids: Here, you agree to the rate, yield, or discount margin set during the auction. Bidders are limited to $5 million per auction with noncompetitive bids.
• A single-price auction: This is when Treasury bonds, bills, and notes are sold at the highest rate, yield, or spread of the accepted competitive bids for all competitive and noncompetitive bidders.

The Treasury also auctions previously issued securities, called reopened securities. Like the originals, the reopened securities have the same maturity date and interest rates. The only difference is the issue date and the price.

Tax Implications

The tax consequences for Treasury securities are very similar. The interest you earn from T-bonds, T-notes, and T-bills is taxed by the Internal Revenue Service, but they are free from state and local taxes.

If you hold Treasurys, you’ll receive a 1099-INT form. For any security held at TreasuryDirect, as much as 50% of the interest earnings can be withheld to ease your tax bill. You can specify how much you want withheld online.

How To Buy Treasury Bonds, Notes, and Bills

You can pick up Treasury bonds, notes, and bills through the U.S. Treasury at TreasuryDirect.gov or from a bank or broker. Since the last two will lead you through the process, let’s prepare you to buy them yourself.

Setting up an Account

• You’ll need to register for TreasuryDirect. Visit TreasuryDirect.gov and create your account. You’ll have to choose the account type: individual, business or organizational, or estate or trust account.
• Let’s say it’s an individual account. You’ll need your Social Security number, your driver’s license or state ID number, a U.S. address, an email address, and your bank account information.
• Follow the prompts to complete the registration , including those for your security questions. Make sure to verify your email address at the end of the process.

Linking Your Bank Account

• Enter your bank account information (routing number and account number), both for where the funds will come from to pay for Treasurys and where you’ll be depositing when they mature.
• TreasuryDirect will verify your bank accounts. This could include test deposits, which you’ll need to confirm.

Purchasing Treasury Bonds, Notes, and Bills

Once your account is set up, log in to TreasuryDirect. Go to the “BuyDirect” tab and choose which security you want to buy: Treasury bills, notes, or bonds.

Next, fill in the details: how much and the time to maturity. You’ll then confirm your purchase details and payment method—you’ll likely pay directly from your bank account. Once you’re ready, hit submit and then you’ll get a confirmation for the transaction along with its details.

What to do at Maturity

You can hold your Treasury bonds, notes, or bills until they mature and let them be redeemed automatically at that time, with the deposit going right into the bank account you selected.

Also, you can reinvest the proceeds into another Treasury security. Before your Treasurys mature, go to your TreasuryDirect account. There, you can set up reinvestment instructions, making it seamless to roll over the matured security into a new one.

If you have Treasury bonds held by your bank or broker, you’ll need to check with them about how to redeem your bond.

The Bottom Line

Investing in U.S. Treasury bonds, bills, and notes provides a measure of safety and convenience, given the ease of using TreasuryDirect today. Whether through direct purchases via TreasuryDirect or indirectly through ETFs and mutual funds, Treasurys are a reliable vehicle for getting interest income while diversifying and lowering the risk in your portfolio.