What Makes Treasury Bills, Notes, and Bonds Different from One Another

Susan Kelly Updated on Oct 09, 2022

  • Treasury bills are issued with maturities that are less than one year.
  • Terms of two, three, five, seven, and ten years are available for issuing Treasury notes.
  • Treasury bonds typically have periods of thirty years when they are issued. They were brought back into circulation in February 2006.

Treasury Inflation-Protected Securities, often known as TIPS, are issued by the Treasury Department with maturities of five, ten, or thirty years. They function in the same way as standard bonds. The only distinction is that the Treasury Department will boost its value in response to rising inflation.

How the Treasuries Are Operated

All bills, notes, and bonds are auctioned by the Treasury Department, where the interest rate is always the same. When there is a significant demand for something, bidders are willing to pay more than the base price to get the fixed rate. When there is less demand for something, people pay less.

Every six months, the Treasury Department is responsible for making the interest payment on all outstanding notes, bonds, and TIPS. At the time of maturity, bills pay interest. If you keep your Treasurys until they mature, you will get the face value of the bonds in addition to the interest accrued throughout the bond's existence. (Regardless of how much you bought for the Treasury note at the auction, you are entitled to receive the face value.) The bare minimum required to invest is $100. Because of this, they are well within the grasp of many ordinary investors.

Avoid getting the interest rate and the yield on the Treasury confused with one another. The annualized rate of return on investment over its whole term is called yield. Treasury rates are subject to weekly fluctuations because they are auctioned off. When there is a low level of demand, notes are offered at a discount from their face value. The discount is equivalent to purchasing them when they are on sale. Because of this, the yield is rather high. Because buyers pay less for the fixed interest rate, they get a greater value for their monetary investment.

On the other hand, when there is a large demand for them, they are sold at auction for more than their face value. As a direct consequence of this, the yield is reduced. The purchasers paid a higher price for the same interest rate, which means they received a lower return on their investment.

The unpredictability that followed the financial crisis of 2008 contributed to an increase in demand for Treasurys. The demand for Treasurys hit all-time high levels on June 1, 2012. The yield on the 10-year Treasury note fell to 1.47%, the lowest level in more than 200 years of record-keeping. The financial crisis in the eurozone caused investors to seek refuge in very secure Treasury bonds, which contributed to this fall. The yield dropped to a new all-time low of 1.43% on July 25, 2012, setting a new record. The yield reached an all-time low of 1.375% throughout the trading day on July 5, 2016. These lows had the effect of flattening down the yield curve for Treasury securities.

How to Invest in the Treasury

There are three different channels available for purchasing Treasurys. The first kind of auction is a "noncompetitive bid auction." That price is for investors who are certain that they want the note and are prepared to settle for any yield. The vast majority of individual investors use this strategy. They may finish their purchase by logging into the TreasuryDirect website. Using this strategy, a person may only purchase a maximum of $5 million worth of Treasurys during any particular auction.

The second kind of auction is one with competitive bidding. This is for investors who are only prepared to purchase Treasury securities provided the yield meets their expectations. They are required to go via a financial institution or a broker. Using this strategy, the investor has the potential to purchase up to 35 percent of the original offering amount made by the Treasury Department.

The third way is in the secondary market, where current owners of Treasury securities may sell their holdings before the assets reach maturity. The bank or the broker plays the role of the intermediary.

You do not need to hold any Treasury securities to benefit from their stability. The majority of fixed-income mutual funds invest in Treasury securities. You might also invest in a mutual fund that consists only of Treasury securities. There are also exchange-traded funds that follow the performance of Treasurys without actually holding any of the securities themselves. If you have a diverse investment portfolio, it is likely that you already possess Treasury securities.