According to the U.S. Treasury Department, the selling of national debt to fund operations dates back to the Revolutionary War. The first Treasury Bills hit the market in 1929 followed by the widely popular U.S. savings bonds in 1935 and finally the Treasury notes.
U.S. savings bonds, U.S. Treasury bills, and notes are all investment products sold by the U.S. government to help finance its operations. The investor effectively loans money to the federal government and earns a profit in return.
Key Takeaways
U.S. savings bonds, T-bills, and T-notes are all forms of debt issued by the federal government to help finance its operations.
Bonds typically mature in 20-30 years and offer investors the highest interest payments to maturity.
T-notes mature anywhere between two and 10 years, with bi-annual interest payments, while T-bills have the shortest maturity terms—from four weeks to a year.
These all can be bought and sold in the secondary market, except for savings bonds, which are registered to just a single owner.
U.S. Bonds
The U.S. savings bond is the original savings vehicle for the small American investor, backed by the full faith and credit of the U.S. government.
Unlike the other government debt instruments, savings bonds are registered to a single owner and are not transferable. That is, they cannot be resold;however, they can be inherited, and they can be cashed in early with payment of an interest penalty.
Savings bonds have not been printed on paper since 2012, and they are no longer sold at banks or post offices. Today, savings bonds can only be purchased online through the TreasuryDirect website.
The most common savings bonds for investors are the Series EE and the Series I bonds. They are an option in some company retirement plans. Series EE bonds can be purchased for as little as $25 or as much as $10,000. They are guaranteed to at least double in value in 20 years and can continue to pay interest for up to 30 years after issuance.
Series I savings bonds have built-in protection against inflation. They are issued with a fixed rate of return plus a variable inflation rate that is based on the Consumer Price Index (CPI). They also can earn interest for up to 30 years.
Treasury Bills
The U.S. Treasury bill, or T-bill, is a short-term investment, by definition maturing in one year or less. A T-bill pays no interest but is almost always sold at a discount to its par value or face value. So the investor pays less than full value upfront for the T-bill and gets the full value at the maturity date. The difference between the two numbers is the investor's return on the investment.
For example, an investor who purchases a $100 T-bill at a discount price of $97 will receive the $100 face value at maturity. The $3 difference represents the return on the security.
Treasury bills can be bought through a bank or broker, or at the TreasuryDirect.gov website. Because of their short-term and nearly risk-free nature, T-bills are among the safest, most liquid securities in the world and form the foundation of several important markets such as the overnight interbank repo market, money market funds, and the commercial paper market.
Treasury Notes
Treasury notes, called T-notes, are similar to Treasury bonds but they are short-term rather than long-term investments. T-notes are issued in $100 increments in terms of two, three, five, seven, and 10 years. The investor is paid a fixed rate of interest twice a year until the maturity date of the note.
Treasury notes are sold at a government auction. The buyer may enter a competitive bid, specifying a yield, or a non-competitive bid, agreeing to buy at the yield determined by auction.
Like T-bills, T-notes can be bought through a bank, a broker, or the TreasuryDirect.gov website.
Special Considerations
For the individual investor, U.S. government debt represents a safe investment with a modest return. In fact, these bonds are considered to be among the safest investments in the world, and as a result, carry quite modest yields for investors, with short-term T-bills earning only the risk-free rate of return.
The U.S. government has never defaulted on any of its bond obligations.
Here are some sample rates:
Series I bonds issued from May 2022 to October 2022 have a composite rate of 9.62%.
A 52-week T-bill was selling at auction at an average discount of 3.84% as of Oct. 3, 2022.
How Can I Buy Treasury Bills?
Treasury bills can be purchased directly from the government on the website, TreasuryDirect.gov. TreasuryDirect is an online platform where individuals can buy government securities once opening an account. Alternatively, individuals can purchase bills from a broker or a bank.
What Is Riskier, Treasury Bonds or Bills?
Both Treasury bonds and bills have no default risk as they are backed by the full faith and credit of the U.S. government. Given the strength of the U.S. economy, these securities come with no risks. An investor will receive the full face value of the instrument at maturity.
What Has a Longer Maturity, a Treasury Bill or a Bond?
Treasury bills are short-term investments, with a maturity between a few weeks to a year from the time of purchase. Treasury bonds are more varied and are longer-term investments that are held for more than a year. Treasury bonds also have a higher interest payout than bills.
Bonds typically mature in 20-30 years and offer investors the highest interest payments to maturity. T-notes
T-notes
A Treasury note is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years. Treasury notes are available either via competitive bids, in which an investor specifies the yield, or non-competitive bids, in which the investor accepts whatever yield is determined.
mature between two and 10 years, with bi-annual interest payments, while T-bills
T-bills
A Treasury Bill (T-Bill) is a short-term debt obligation backed by the U.S. Treasury Department with a one-year maturity or less. Treasury bills are usually sold in denominations of $1,000, while some can reach a maximum denomination of $5 million. T-bill rates depend on interest rate expectations.
Key takeaways. Treasury bills have short-term maturities and pay interest at maturity. Treasury notes have mid-range maturities and pay interest every 6 months. Treasury bonds have long maturities and pay interest every 6 months.
Whether you invest in Treasury bonds or bills depends on your time horizon and risk tolerance. If you'll need the money sooner, a Treasury bill with a shorter maturity might be best. If you have a longer time horizon, Treasury notes with maturities of up to 10 years might be better.
Bonds are long-term securities that mature in 20 or 30 years.Notes are relatively short or medium-term securities that mature in 2, 3, 5, 7, or 10 years. Both bonds and notes pay interest every six months. The interest rate for a particular security is set at the auction.
Traditional bonds are generally considered safer investments compared to structured notes. Bonds issued by solid governments or companies with high credit ratings have a lower default risk. However, all bonds are subject to interest rate and market risks.
Interest income from Treasury securities is subject to federal income tax but exempt from state and local taxes. Income from Treasury bills is paid at maturity and, thus, tax-reportable in the year in which it is received.
We sell Treasury Notes for a term of 2, 3, 5, 7, or 10 years. Notes pay a fixed rate of interest every six months until they mature. You can hold a note until it matures or sell it before it matures.
Often, CDs pay higher rates for longer term lengths. Treasury bills are short-term securities issued by the U.S. Treasury, with terms that range between four and 52 weeks. They are considered a type of bond, but don't pay a coupon (interest).
Since the U.S. government backs T-bills, they're considered lower-risk investments. The most common terms for T-bills are for four, eight, 13, 17, 26 and 52 weeks. The shorter terms to maturity differentiate them from other Treasury-issued securities.
You can hold a bill until it matures or sell it before it matures. Note about Cash Management Bills: We also sell Cash Management Bills (CMBs) at various times and for variable terms.
Are Treasury bills taxed as capital gains? Normally no. However, if you buy a T-bill in the secondary market and then achieve a profit, you may be liable for capital gains depending on your exact purchase price.
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
U.S. savings bonds are a long-term choice and are appropriate for savers looking at a 20-year or 30-year time horizon. Treasury bills are a short-term alternative, maturing in a year or less. Treasury notes are at the midpoint, maturing in two to 10 years.
Preferred stock resembles bonds even more and is considered a fixed-income investment that's generally riskier than bonds but less risky than common stock. Preferred stocks pay out dividends that are often higher than both the dividends from common stock and the interest payments from bonds.
You can only buy T-bills in electronic form, either from a brokerage firm or directly from the government at TreasuryDirect.gov. (You can also buy Series I savings bonds through TreasuryDirect.gov). The most common maturity dates are four weeks, eight weeks, 13 weeks, 26 weeks and 52 weeks.
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
A Treasury note has a maturity between one and 10 years. A Treasury bond has a maturity of more than 10 years. Short-term Treasuries with maturities of less than one year are called Treasury bills. The three distinctions are largely arbitrary, based on how far in the future each debt will mature.
But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered. If you're interested in investing in Treasury bonds or have other questions about your portfolio, consider speaking with a financial advisor.
Introduction: My name is Pres. Carey Rath, I am a faithful, funny, vast, joyous, lively, brave, glamorous person who loves writing and wants to share my knowledge and understanding with you.
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