Learn how US Treasury bonds work, their types, benefits, risks, and how to buy them, with clear guidance and insights from Vanguard investors.
U.S. Treasury bonds and other securities
U.S. Treasury securities, particularly bonds, are a popular investment option for many individuals due to their reputation as one of the safest investments available. This is because these securities are backed by the full faith and credit of the U.S. government, making them a low-risk option for investors. There are 3 common types of Treasury securities (U.S. Treasury bonds, notes, and bills), each with different maturity dates and interest rates.
Key insights
- U.S. Treasury bonds are long‑term debt investments issued by the U.S. government that pay interest every 6 months. They're part of the broader Treasury securities category, along with Treasury bills and notes.
- Treasury securities—especially bonds—are considered some of the safest investment vehicles because they're backed by the U.S. government and they offer a fixed rate of return. They're used as a benchmark for other interest rates, making them an important indicator of the overall economy.
- You can choose Treasury securities across a range of maturities (from days to 30 years), but their market value may fluctuate as interest rates change, even though you'll get your original amount back at maturity.
- Treasury bonds and other securities are typically sold at auction based on demand, and you can easily buy or sell them later, giving you flexibility if you need access to your money.
- Interest earned from Treasury bonds and other securities is taxable at the federal level but exempt from state and local taxes.
What's a Treasury bond?
U.S. Treasury bonds are long-term debt instruments issued by the Department of the Treasury to finance the government's spending needs, such as social programs, military spending, and infrastructure projects. Backed by the full faith and credit of the U.S. government, Treasury bonds represent one of the safest investment options available. They also serve as a key tool for the Federal Reserve to implement monetary policy.
Treasury bonds are part of the broader category of Treasury securities (Treasuries), which includes all debt issued by the U.S. Treasury—such as bonds, notes, bills, and other instruments. While "Treasury securities" refers to this full range, "Treasury bonds" (T-bonds) specifically refer to long-term investments.
Although the terms are often used interchangeably, understanding the distinction helps investors choose the right time horizon. T-bonds are considered low risk, with a high likelihood of timely principal and interest payments.
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Types of U.S. Treasury bonds and related securities
Treasury bonds (T-bonds)
Treasury bonds, or T-bonds, are issued with maturities between 20 and 30 years.
One of the key features of T-bonds is that they offer semiannual interest payments, providing investors with a steady stream of income. Additionally, at maturity, the bondholder receives the face value of the bond, making it a reliable source of income for those looking to plan for the future.
T-bonds are exempt from state and local taxes and have historically performed well, even during economic downturns. Both these points make T-bonds a popular choice for long-term investing, such as for retirement planning.
Treasury notes (T-notes)
Treasury notes are issued with maturities of 2 to 10 years. Interest is paid every 6 months. This means that investors who purchase T-notes can expect to receive a steady stream of interest payments before the principal amount is repaid. This medium-term nature of T-notes allows for flexibility in investment planning, as investors have the option to hold onto the notes until maturity or sell them on the secondary market. Additionally, T-notes pay interest that's exempt from state and local taxes, making them a popular choice for investors looking to minimize their tax liability.
Treasury bills (T-bills)
Treasury bills, or T-bills, are issued with maturities of 52 weeks or less. They're issued at a discount and redeemed at face value, making them a low-risk investment option. The difference is calculated as the taxable interest income.
T-bills are short-term government bonds that are typically sold in durations of 4, 8, 13, 17, 26, or 52 weeks. This short-term nature allows investors to quickly access their funds and reinvest in other opportunities. T-bills are also commonly used in portfolio diversification, as they can provide stability and counterbalance more volatile assets, reducing overall risk.
Treasury Separate Trading of Registered Interest and Principal of Securities (STRIPS)
Treasury Separate Trading of Registered Interest and Principal of Securities (STRIPS) are created when broker-dealers or the Treasury separates ("strips") the interest and principal of a Treasury note or bond into separate components, which are then traded as zero-coupon securities. Investors buy STRIPS at a price below the face value of the securities and then receive the full amount when the STRIPS mature.
Zero-coupon securities are often sought after by buyers such as pension funds, who are looking for long-term investments with predictable returns. This allows them to plan for future payments and manage their funds more effectively.
Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are issued in terms of 5, 10, and 30 years. The principal amount rises or falls depending on the consumer price index (CPI). This means that the investor's purchasing power remains the same, even if inflation increases. For example, if an investor purchases a $100 TIPS with a 2% fixed interest rate and the CPI increases by 3%, the principal amount will be adjusted to $103, maintaining the purchasing power of the initial investment. TIPS pay interest semiannually at a fixed rate applied to the inflation-adjusted principal. At maturity, the holder is paid the adjusted principal or original principal, whichever is greater. The yield quoted on TIPS is exclusive of inflation or deflation. During periods of deflation, previous positive adjustments to the inflation factor will erode. This means that investors purchasing previously issued TIPS may experience a loss of principal.
The principal amount of TIPS is adjusted every 6 months based on the CPI. This makes TIPS a popular investment option for those looking to protect their money from the effects of inflation.
Treasury Floating Rate Notes (FRNs)
Treasury Floating Rate Notes (FRNs) are issued with a maturity of 2 years.
The interest rate on a Treasury FRN:
- Is tied to short-term rates such as SOFR or the federal funds rate.
- Resets weekly.
- Is the sum of the index rate and the spread.
When Treasury bill rates rise, the FRN's interest payments will increase. Similarly, as Treasury bill rates fall, the FRN's interest payments will decrease. Interest is paid quarterly. FRNs may have a negative spread, which was set at the auction. This means that the yield on this FRN will likely be lower than the yield of the current 13-week Treasury bill.
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Treasury bonds vs. Treasury notes vs. Treasury bills
Treasury bonds (T-bonds)
- Maturity: 20 to 30 years
- Interest payments: Fixed rate, paid semiannually (every 6 months)
- Typical use cases: Long-term investing, retirement planning, estate planning, and steady income over decades
Treasury notes (T-notes)
- Maturity: 2 to 10 years
- Interest payments: Fixed rate, paid semiannually (every 6 months)
- Typical use cases: Medium-term financial goals, college savings, portfolio diversification, and balancing short- and long-term investments
Treasury bills (T-bills)
- Maturity: 4, 8, 13, 17, 26, or 52 weeks
- Interest payments: No periodic interest; sold at a discount and redeemed at full face value (the difference represents your return)
- Typical use cases: Short-term cash management, emergency funds, parking cash between investments, and preserving capital with minimal risk
Key takeaway: T-bonds are generally a suitable choice for long-term stability, T-notes work well for medium-term goals with regular income, and T-bills offer short-term liquidity and safety.
How do Treasury bonds and securities work?
Treasury auctions
The U.S. Treasury sells securities through a schedule of regular public auctions, which determine the yield of the securities. It makes periodic adjustments to the auction calendar as its borrowing needs change.
The Treasury announces the amount to be auctioned, and other details including the maturity and settlement dates, several days before the upcoming issue. Securities are auctioned by competitive and noncompetitive bids. Competitive bids generally are placed by dealers and other institutions. Vanguard Brokerage Services® offer only noncompetitive bids limited to $10 million per security per household in one auction. Competitive and noncompetitive bidders receive the same rate or yield at auction.
A noncompetitive bid is a bid placed by an investor or entity in a government securities auction without specifying a desired yield or price. This type of bid is usually submitted by small investors or bidders who aren't concerned with the exact yield or price at which they'll receive the security. Noncompetitive bids are accepted at the average yield awarded in the auction, allowing small investors to participate in the auction process alongside larger, more competitive bidders.
You can purchase U.S. Treasury securities through TreasuryDirect or through your Vanguard Brokerage Account.
Secondary market
The secondary market is where investors can buy and sell previously issued securities, such as Treasury bonds. These securities are initially issued in the primary market by the government or corporations to raise funds. Investors can then trade these securities in the secondary market, allowing for liquidity and price discovery.
To buy or sell Treasury bonds in the secondary market, investors can use a brokerage account or work with a financial advisor who has access to the market. This allows for greater flexibility and opportunities for investors to manage their portfolios and potentially earn a return on their investment.
Yields on Treasury securities
Yield refers to the annual return on an investment that an investor can expect to receive from a particular security. The calculation of yield considers the current market price of the security, its coupon rate, and the time to maturity.
Treasuries usually offer lower yields than other fixed income securities because their minimal risk makes them among the safest investments available. This low risk that the securities will default is what makes them attractive to investors.
There are 2 types of yields commonly used for Treasury securities:
- Current yield. This reflects the annual interest payment as a percentage of the current market price.
- Yield to maturity. This is the total return an investor can expect if they hold the security until it matures.
The price of Treasury securities and market interest rates have a significant impact on yields. When market interest rates rise, the price of Treasury securities falls, resulting in a higher yield. Conversely, when interest rates decrease, the price of Treasury securities rises, resulting in a lower yield.
It's important to note that yields differ for different types of Treasury securities. T-bills, which have a maturity of less than one year, generally have lower yields compared to T-notes and T-bonds, which have longer maturities. This is because investors demand a higher return for holding longer-term securities.
Interest rates and Treasury securities
Treasury securities' interest rates are determined by the supply and demand for these securities in the financial market. The U.S. Department of the Treasury sets the interest rate for these securities based on current market conditions and the government's borrowing needs.
There's an inverse relationship between interest rates and the price of securities. When interest rates rise, the price of securities decreases, and vice versa. This is because investors are more likely to invest in higher yielding securities, causing the demand for lower yielding securities to decrease, thus lowering their price.
Inflation and Federal Reserve policies also play a significant role in determining interest rates on Treasury securities. Inflation erodes the purchasing power of money, causing investors to demand higher interest rates to compensate for the loss. The Federal Reserve, through its monetary policy decisions, can also influence interest rates by adjusting the federal funds rate, which can affect the overall level of interest rates in the economy.
Taxability of Treasury securities
The interest income on Treasury securities is subject to federal taxes but is exempt from state and local taxes.
Treasury notes and bonds, when bought at a discount, may subject investors to capital gains taxes when sold or redeemed. Investors should consult a tax professional for additional information.
Treasury STRIPS and TIPS investors must pay taxes on interest accrued or inflation protection added in the most recent year, even though no cash payments have been received (this is referred to as a tax on "phantom income"). Investors should consult a tax professional for more information.
Interest earned on FRNs is taxable as ordinary income and is subject to federal income tax.
Fees
Vanguard Brokerage Services doesn't charge commissions for any Treasury order placed online.
Benefits of investing in Treasury bonds and securities
Safety, security, and predictable returns
Treasury securities are considered some of the safest investments available. The government guarantees to repay the principal and interest on these securities, making them a low-risk option for investors. Additionally, Treasuries have a fixed interest rate and a set maturity date, providing investors with predictability and stability. They also have low inflation risk because interest rates are set by the market and adjusted for inflation. This makes Treasury bills, notes, and bonds all reliable choices for those seeking to minimize risk in their investment portfolio.
Liquidity
Vanguard Brokerage Services doesn't make a market in Treasury securities. If you wish to sell your Treasury securities prior to maturity, Vanguard Brokerage Services can provide access to a secondary over-the-counter market. In general, the secondary market for outstanding Treasuries provides liquidity, and the spread between bid and offer is usually narrower than for other fixed income securities. Nevertheless, liquidity will vary depending on a specific bond's features, lot size, and other market conditions. Treasuries sold prior to maturity may be subject to substantial gain or loss.
Treasury bond risks
Treasury prices can rise or fall depending on interest rates. Interest rate changes generally have a greater effect on long-term Treasury prices.
All bonds carry risk that the issuer will default or be unable to make timely payments of interest and principal. However, Treasuries carry minimal risk since they're backed by the U.S. government.
Treasuries sold before maturity may face a substantial gain or loss. The secondary market may also be limited.
How to buy Treasury bonds and securities
Purchasing Treasury bonds and securities is a great way to invest in the stability and security of the U.S. government. To buy Treasury bonds and securities, you can visit the official website of the U.S. Treasury Department or go through a broker. Treasury exchange-traded funds (ETFs) and mutual funds, which offer a diversified portfolio of Treasury bonds, can be purchased through most major online brokers or financial institutions. It's important to do your research and understand the different types of Treasury investments available before making a purchase (as well as choosing between funds and individual securities). Additionally, keep in mind that the value of these investments may fluctuate with changes in interest rates and market conditions.
Does Vanguard offer I-bonds?
No, Vanguard does not offer I-bonds. I-bonds are savings bonds issued by the U.S. Treasury and can only be purchased directly through the Treasury's TreasuryDirect.gov website or, in some cases, at local banks.
However, Vanguard does offer Treasury Inflation-Protected Securities (TIPS), which provide similar inflation protection and can be purchased through your Vanguard Brokerage Account. While TIPS and I-bonds both protect against inflation, TIPS are marketable securities that can be traded, whereas I-bonds must be held for at least 1 year and are designed for individual savers rather than institutional investors.
Frequently asked questions about U.S. Treasury bonds
If you hold a Treasury bond until maturity, you're highly likely to receive your full principal back plus all interest payments—the U.S. government has never defaulted on its debt obligations. However, you can lose money in 2 scenarios:
- Selling before maturity. If you need to sell your Treasury bond before it matures, its market value may be lower than what you paid, especially if interest rates have risen since you purchased it. When rates go up, existing bond prices fall.
- Inflation risk. While your original investment is considered very safe, inflation can erode your purchasing power over time. For example, if your bond pays 3% interest but inflation runs at 4%, your real return is negative. This is why some investors choose Treasury Inflation-Protected Securities (TIPS) for inflation protection.
The bottom line: Treasury bonds are among the safest investments available, but they're not entirely risk-free if you need to sell early or if inflation outpaces your returns.
Treasury bonds typically perform well during market volatility and economic uncertainty. When stocks decline, investors often shift money into Treasury bonds as a "safe haven," increasing demand and driving up bond prices. This inverse relationship with stocks makes Treasury bonds valuable for portfolio diversification and stability.
However, if volatility is driven by inflation concerns or fears about government fiscal policy, Treasury bond prices may decline as investors demand higher yields. Treasury bonds have historically served as a reliable buffer during stock market turbulence, which is why many investors hold them as a core component of their portfolio.
The answer depends on your financial goals and timeline. Each option serves different needs. For example, Treasury bonds offer tax advantages (they're exempt from state and local taxes), potentially higher yields for long-term commitments (20 to 30 years), and can be sold on the secondary market if needed. They're ideal for long-term goals like retirement planning.
Savings accounts provide immediate access to your money with FDIC insurance up to $250,000, making them a good choice for emergency funds and short-term needs. However, they typically offer lower interest rates.
Certificates of deposit (CDs) offer FDIC insurance, fixed rates, and terms ranging from a few months to several years. They generally provide higher rates than savings accounts but charge penalties for early withdrawal. CDs work well for medium-term goals with known timelines.
Many investors hold all 3 as part of a diversified strategy.
Treasury bonds pay interest twice a year (semiannually), typically every 6 months from the issue date. So if you purchase a Treasury bond in January, you'll receive interest payments in January and July each year until the bond matures.
These fixed interest payments provide a predictable income stream, making Treasury bonds attractive for retirees and other investors seeking regular, reliable cash flow. At maturity, you'll receive your final interest payment along with the full principal amount.