Key Takeaways
- Medium-term U.S. government debt, 2-10 years.
- Pays fixed interest every six months.
- Low-risk, highly liquid investment.
- Interest exempt from state and local taxes.
What is Treasury Notes?
Treasury notes are medium-term U.S. government debt securities with maturities ranging from two to ten years that pay fixed interest every six months. When you buy a Treasury note, you lend money to the government, which acts as an obligation to repay you with interest and principal at maturity.
These notes serve as a popular option for investors seeking reliable income and are considered a safe haven asset in volatile markets.
Key Characteristics
Treasury notes offer a blend of security, income, and moderate maturity lengths. Key features include:
- Maturities: Available in 2, 3, 5, 7, and 10-year terms, allowing you to tailor investments to your time horizon.
- Interest payments: Fixed rate paid semiannually, providing predictable income streams.
- Price variations: Notes can trade above or below their face value depending on interest rate movements.
- Low risk: Backed by the full faith and credit of the U.S. government, making them a highly secure investment.
- Liquidity: Easily bought or sold on secondary markets, offering flexibility before maturity.
How It Works
When you invest in Treasury notes, you lock in a fixed interest rate paid every six months until maturity. The government repays the note’s full face value at the end of the term, making it a reliable income source with minimal default risk.
Many investors use Treasury notes as part of a laddering strategy to spread out maturities, reduce reinvestment risk, and maintain steady cash flow. You can purchase notes directly through TreasuryDirect or via brokerages and also access related bond exposure through funds like best bond ETFs.
Examples and Use Cases
Treasury notes fit well in various investment portfolios, especially for those prioritizing stability and income.
- Retirement portfolios: Provide predictable income streams and reduce volatility compared to equities.
- Corporate treasury management: Companies like BND incorporate Treasury notes to balance risk and liquidity.
- Industry examples: Airlines such as Delta may use Treasury notes in cash reserves to maintain liquidity amid industry fluctuations.
Important Considerations
While Treasury notes offer safety and steady income, their fixed interest may underperform in rising rate environments. Assess your investment timeline and interest rate outlook before committing.
Also, note that interest income is exempt from state and local taxes but subject to federal income tax, an important factor when comparing returns. Diversifying with other debt instruments or funds can help balance risk and return effectively.
Final Words
Treasury notes provide a reliable, low-risk way to earn steady interest over a medium-term horizon. Consider comparing current yields across maturities to find the best fit for your investment goals.
Frequently Asked Questions
Treasury notes, or T-notes, are medium-term debt securities issued by the U.S. government with maturities ranging from two to ten years. They pay fixed interest every six months and return the full face value at maturity.
Treasury notes differ mainly in their maturity period, which ranges from 2 to 10 years. Unlike Treasury bills that mature in less than a year or Treasury bonds with longer maturities, T-notes offer a balanced medium-term investment option.
Yes, Treasury notes are considered low-risk investments because they are backed by the full faith and credit of the U.S. government. They are also highly liquid, making them a secure choice for many investors.
Interest earned on Treasury notes is exempt from state and local taxes, but it is subject to federal income tax. You must report and pay federal taxes on the interest annually.
You can purchase Treasury notes directly from the U.S. government at TreasuryDirect.gov, through banks, online brokerages, or via mutual funds and ETFs. The minimum investment is $100, with increments of $100.
Yes, Treasury notes are liquid investments that you can sell before their maturity date. This provides flexibility if you need to access your funds earlier than planned.
Treasury notes generally offer moderate returns that are higher than Treasury bills but lower than longer-term Treasury bonds. They balance return and interest rate risk effectively for medium-term investments.
The 10-year Treasury note is a key benchmark that reflects broader economic conditions and influences other interest rates, such as those for mortgages and savings accounts. It serves as an important indicator for investors and policymakers.
