Introduction

The U.S. government finances its operations and other expenditures partly by borrowing money from investors. One of the primary ways it does this is by issuing Treasury securities, which are debt investments backed by the U.S. government.

The three main types of marketable Treasury securities are Treasury bills, Treasury notes, and Treasury bonds. They differ primarily in their maturity periods and how they provide returns to investors.

Understanding these securities can help investors evaluate government debt and better understand the role that fixed-income investments can play in a portfolio.

1. What Are Treasury Securities?

Treasury securities are debt obligations issued by the U.S. Department of the Treasury.

When an investor purchases a Treasury security, they are effectively lending money to the federal government. In exchange, the government agrees to make the required payments and repay the security's principal according to its terms.

Treasury securities are commonly used by investors seeking relatively low-credit-risk investments, although they are still subject to risks such as interest rate and inflation risk.

2. What Are Treasury Bills?

Treasury bills (T-bills) are short-term government securities with maturities of one year or less.

Unlike many longer-term bonds, T-bills generally do not make periodic interest payments. Instead, they are typically sold at a discount to their face value.

For example, an investor might purchase a T-bill for less than $1,000 and receive $1,000 when it matures. The difference between the purchase price and the amount received represents the investor's return.

T-bills are commonly used for short-term cash management and are generally considered among the lower-credit-risk investments available to investors.

3. What Are Treasury Notes?

Treasury notes (T-notes) are medium-term government securities that generally mature in more than one year but no more than 10 years.

T-notes typically pay interest every six months at a fixed rate. At maturity, the investor receives the security's face value, assuming the government fulfills its obligation.

Because T-notes have longer maturities than T-bills, their market prices can be more sensitive to changes in interest rates.

4. What Are Treasury Bonds?

Treasury bonds (T-bonds) are long-term government securities with maturities generally longer than 10 years.

Like Treasury notes, Treasury bonds typically make interest payments every six months and return the principal at maturity.

Because of their longer maturities, Treasury bonds can experience greater price fluctuations when interest rates change. However, investors who hold them until maturity may receive their scheduled interest payments and principal, assuming the government fulfills its obligations.

5. How Do Treasury Prices and Yields Work?

Treasury securities can be bought and sold in the secondary market, meaning their prices can change after they are originally issued.

Generally, bond prices and market yields move in opposite directions. When market interest rates rise, existing Treasury securities with lower interest rates may become less attractive, causing their market prices to decline. When market rates fall, existing securities with higher rates may become more attractive, potentially increasing their prices.

The effect tends to be more significant for securities with longer maturities.

Conclusion

Treasury bills, notes, and bonds are debt securities issued by the U.S. government with different maturity periods and structures.

Treasury bills are designed for shorter-term borrowing, Treasury notes generally provide medium-term exposure, and Treasury bonds are intended for longer-term borrowing. While Treasury securities generally have relatively low credit risk, their prices can still fluctuate because of interest rates, inflation, and market conditions.

Understanding the differences between these securities can help investors better evaluate government debt and determine how fixed-income investments may fit within a broader investment strategy.