Treasury notes (USA)

What is a treasury note?

A treasury note (T-note for short) is a marketable U.S. government debt security with a fixed interest rate which is not less than 0.125% and a maturity with 2, 3, 5, 7 or 10 years. Interest payments on treasury notes are made semiannually, providing investors with a regular income stream. However, it's important to note that while interest income from treasury notes is exempt from state and local taxes, it is subject to federal taxation, similar to a treasury bond and treasury bill.

Treasury notes are available from the government with either a competitive or noncompetitive bid. With a competitive bid, investors specify the yield they want, at the risk that their bid may not be approved; with a noncompetitive bid, investors accept whatever yield is determined at auction.

Treasury notes explained

These notes are sought after for their relatively low risk and steady income stream, making them a popular choice for investors seeking a balance of income and security in their investment portfolio.

Unlike treasury bonds, which have maturities exceeding 10 years and can stretch up to 30 years, treasury notes offer shorter-term investment options, catering to investors with varying risk appetites and investment horizons. This shorter maturity also means that treasury notes typically offer lower yields compared to longer-dated Treasury bonds.

The existence of a large secondary market for treasury notes enhances their liquidity, allowing investors to easily buy and sell these securities before their maturity date. This liquidity adds to the appeal of treasury notes, making them a flexible component of an investment portfolio.

Risks

1. Interest Rate Risk. The longer the maturity of a treasury note, the higher its exposure to interest rate risk. Changes in interest rates can affect the value of the note, leading to fluctuations in its price.

2. Duration Sensitivity. Treasury notes have differing levels of sensitivity to changes in interest rates, measured by duration. Factors such as coupon, yield, present value, final maturity, and call features contribute to a note's duration, which is expressed in years.

3. Federal Reserve Policy. Changes in benchmark interest rates by the Federal Reserve, such as the federal funds rate, can impact treasury note prices. For example, an increase in benchmark rates can lead to a decrease in the prices of outstanding treasury notes and bonds.

4. Yield Curve Risk. Changes in investors' expectations can result in shifts in the yield curve, affecting treasury note prices. Yield curve risk arises from steepening or flattening of the yield curve, where the spread between short- and long-term interest rates widens or narrows, respectively.

5. Inverted Yield Curve. An inverted yield curve occurs when short-term interest rates are higher than long-term rates, leading to decreased prices of long-term treasury notes relative to short-term notes.

6. Flattening Yield Curve. Conversely, a flattening yield curve occurs when the spread narrows, causing short-term note prices to decrease relative to long-term notes.

How to buy treasury notes

1. Through a Bank or Online Brokerage. You can purchase treasury notes through a bank or online brokerage platform. These platforms offer convenient ways to invest in Treasury securities like T-Notes.

2. Directly from the U.S. Government at TreasuryDirect.gov. Another option is to buy treasury notes directly from the U.S. government through TreasuryDirect.gov. This allows you to buy Treasury securities without going through a third-party broker.

3. Minimum Investment. Treasury notes can be purchased for a minimum investment of $100, with the flexibility to invest in increments of $100 up to $10 million. This makes treasury notes accessible to a wide range of investors.

4. Mutual Funds and ETFs. For easy diversification, you can also invest in a collection of treasury notes through mutual funds and exchange-traded funds (ETFs). These funds pool together investors' money to invest in a diversified portfolio of Treasury securities, including T-Notes.

Treasury bills vs. Treasury notes

1. Maturity Dates. Treasury bills, also known as T-bills, have shorter maturity dates ranging from a few days to 52 weeks. Treasury notes, on the other hand, have longer maturity dates of 2, 3, 5, 7, or 10 years.

2. Payment Structures. Treasury bills are sold at a discount to their face value and do not pay interest before maturity. Investors purchase T-bills at a price below their face value and receive the face value when the bill matures. Treasury notes, however, pay interest every six months until maturity. This interest is paid semiannually, providing investors with a regular income stream.

3. Maturities. Treasury bills offer short-term debt obligations, making them suitable for investors seeking short-term investments or liquidity management. Treasury notes provide longer-term investment options, catering to investors with longer investment horizons who seek steady income over a longer period.

Example

An example of a Treasury Note would be a 5-year Treasury Note issued by the federal government. This Treasury Note represents a short-term debt obligation with a maturity of five years. Investors who purchase this Treasury Note can expect semi-annual interest payments, providing them with interest earned on their investment. Upon maturity, investors will receive the return of their principal investment. These Treasury Notes are considered to be a secure investment option, backed by the full faith and credit of the U.S. government. They offer a fixed rate of return, making them attractive to investors seeking steady income. Additionally, Treasury Notes are commonly held in investment portfolios alongside other investments such as stocks, providing diversification and mitigating default risk.