Treasury Bonds vs. Treasury Notes vs. Treasury Bills

Investing in treasury bills, notes, and bonds are issued by the US government and are backed by it, making them a choice among investors seeking to preserve capital and earn a modest return. 

While all three types of securities are Federal government debt obligations, they differ in terms of maturity, interest payments, and risk profile. Investors can consider investing in treasuries as part of a diversified portfolio to reduce risk and potentially enhance returns. Understanding the differences between bills, notes, and bonds is essential for making informed investment decisions and maximizing returns.

Let's get started by understanding the differences between all of them: treasury bill vs note vs bond.

What is a treasury bill?

T-bills are sold at a discount to their face value and don't pay any interest. This means traders pay less than the full amount the bill will be worth when treasury bills mature. The difference between the purchase price and the face value is the return. Some types of T-bills include –

• 91-day T-bills: These are the most common type, maturing in 91 days
• 182-day T-bills: These treasury bills mature in 182 days
• 364-day T-bills: these are the longest T-bills, maturing in 364 days

What is a treasury bond?

A treasury bond is a long-term government debt securities obligation. It's a type of bond the government issues to raise funds for long-term projects and programs. Unlike treasury bills, which have a maturity of less than a year, treasury bonds typically have a maturity of 10 to 30 years. Treasury bonds make regular interest payments, known as coupons, throughout their term. These payments are a percentage of the bond's face value. Types of -bonds –

• 10-year treasury notes: These bonds have a maturity of 10 years
• 20-year treasury bonds: These bonds have a maturity of 20 years
• 30-year treasury bonds: These bonds have a maturity of 30 years

Treasury bills vs. bonds vs. notes side-by-side

Maturity date

Treasury bills have the shortest maturity, typically less than a year. This makes them ideal for short-term cash management or liquidity needs. On the other hand, treasury notes have a medium-term maturity, typically ranging from 2 to 10 years. This makes them suitable for intermediate-term investment goals.

Treasury bonds have the longest maturity, typically ranging from 10 to 30 years. This makes them ideal for long-term investment goals.

Interest payments

Treasury bills do not pay interest. Instead, they are sold at a discount to their face value. The difference between the purchase price and the face value is the return. On the other hand, treasury notes and bonds both pay interest semi-annually. This means investors receive regular steady income payments throughout the life of the bond.

Price fluctuations

Treasury bills are the least sensitive to interest rate changes due to their short maturity. This means their prices are relatively stable. On the other hand, treasury notes are moderately sensitive to interest rate changes. As interest rates rise, the price of existing bonds tends to fall, and vice versa.

Lastly, treasury savings bonds are the most sensitive to interest rate changes due to their long maturity. This means their prices can fluctuate significantly in response to interest rate changes.

Risk

Treasury bills are considered the least risky investment option due to their short maturity and the backing of the US government. Similarly, treasury notes are also considered low-risk investments, but they are slightly more susceptible to interest rate fluctuations than bills.

Finally, treasury bonds are considered moderate-risk investments due to their longer maturity and potential for price fluctuations. However, they are still considered relatively less risky than other types of bonds.

Suitability

Treasury bills are suitable for short-term cash management or liquidity needs. On the other hand, treasury notes are suitable for intermediate-term investment goals, such as saving for a down payment on a house or a child's college education.

Additionally, treasury bonds are suitable for long-term investment goals, such as retirement savings. They offer a relatively steady income stream and a lower default risk than other types of investments.

Liquidity

Treasury bills are generally the most liquid of the three, meaning they can be easily bought and sold in the secondary market. Treasury notes are also relatively liquid but may be slightly less so than bills.

On the other hand, treasury bonds are less liquid, especially for longer-term maturities, as there may be fewer buyers and sellers in the market.

Tax implications

Interest income from treasury bills, notes, and savings bonds is generally subject to federal income tax but is exempt from state and local Federal taxes. However, the Federal tax implications can vary depending on individual circumstances, so consulting with a Federal tax professional is important.

Minimum investment

Treasury bills typically have a minimum investment of $100. However, treasury notes and bonds can be purchased in larger denominations, such as $1,000 or $10,000. However, some brokerage firms may allow for smaller investments through a Treasury Bill Reinvestment Program (TBIRP).

Auction vs. secondary market

Treasury bills are typically sold at auction by the US Treasury Department. However, treasury notes and bonds can be purchased both at auction and in the secondary market. This means one can purchase them directly from the government or another investor who owns them.

Interest rate sensitivity

Treasury bills are generally the least sensitive to fixed interest rate changes due to their short maturity. This means their prices are relatively stable. Treasury notes, on the other hand, are moderately sensitive to fixed interest rate changes. As interest rates rise, the price of existing bonds tends to fall, and vice versa.

Lastly, treasury bonds are the most sensitive to interest rate changes due to their long maturity. This means their prices can fluctuate significantly in response to interest rate changes.

Call provisions

Call provisions are clauses in bond contracts that allow the issuer (in this case, the US treasury) to redeem the bond before its stated maturity date. This means the government can essentially buy back the bond from the investor, even if the investor wants to hold it until maturity. While treasury bills are typically short-term investments and don't usually have call provisions, Treasury notes and bonds may include them.

Interest payment timeline

Treasury bills: Do not pay interest. Instead, they are sold at a discount to their face value. The difference between the purchase price and the face value is the return. Treasury notes and bonds: Pay interest semi-annually. This means one receives regular income payments throughout the life of the bond.

Volatility

Treasury bills are the least volatile of the three, meaning their prices are relatively stable due to their short maturity. Treasury notes are moderately volatile, meaning their prices can fluctuate to some extent, and treasury bonds are the most volatile of the three, meaning their prices can fluctuate significantly due to their long maturity and sensitivity to interest rate changes.

Typical returns compared to one another

Treasury bills generally offer the lowest returns of the three but have the lowest risk. In contrast, treasury notes offer moderate returns compared to bills and bonds. Treasury bonds typically offer the highest returns of the three but have the highest risk.

Suitability for different investment goals

Treasury bills are suitable for short-term cash management or liquidity needs. Treasury notes are suitable for intermediate-term investment goals, such as saving for a down payment on a house or a child's college education.

Lastly, treasury bonds are suitable for long-term investment goals like retirement savings. They offer a relatively stable income stream and a lower default risk than other types of investments.

How to invest in treasury securities

There are several ways to invest in treasury government securities –

Directly through the US treasury

TreasuryDirect is the official website of the US Treasury Department. Here, one can open an account and buy treasury bills, notes, and bonds directly. Investors can also purchase securities at auction or purchase existing government securities from other investors.

Through a brokerage firm

• Full-service brokerages: Many brokerage firms offer the ability to purchase and sell Treasury securities. They can provide investors with advice and assistance but may charge fees for their services.
• Discount brokerages: These online brokerages typically offer lower fees than full-service brokerages. However, investors may need to do more research and make one's own investment decisions.

Through a bank

Many banks offer Treasury Bill Reinvestment Programs (TBIRPs), which allow investors to automatically reinvest the proceeds from maturing Treasury bills into new bills. This can be a convenient way to build a portfolio of Treasury securities.

Steps Involved in investing in treasury securities –

1. Choose a treasury security: Decide whether one wants to invest in treasury bills, notes, or bonds based on the investment goals and risk tolerance.
2. Open an account: If one is investing directly through the US treasury or a brokerage firm, one needs to open a TreasuryDirect account.
3. Purchase securities: Determine the amount one wants to invest and place the order. Investors can purchase securities at auction or in the secondary market.
4. Manage investments: Monitor investments and consider exiting positions from the securities when one needs the money or if one wants to rebalance the portfolio.

*This is an example only to enhance a consumer's understanding of the strategy being described above and is not to be taken as Blueberry providing personal advice.

What are the risks of investing in treasuries? 

• Interest rate risk: The prices of treasury bonds and notes can fluctuate in response to changes in interest rates. If interest rates rise after one purchases a bond, the value of the bond may decline. However, this risk is generally lower for treasury bills due to their shorter maturity.
• Inflation risk: While Treasury Inflation-Indexed Securities (TIPS) are designed to protect investors from inflation, other treasury securities may not. If inflation rises faster than the interest rate on the treasury security, the purchasing power will erode.
• Liquidity risk: While treasury securities are generally highly liquid, there may be times when it can be difficult to exit from them, especially for longer-term bonds. This can be a concern if one needs to access the funds quickly.
• Call risk: Some treasury bonds have call provisions, which allow the government to redeem the bond before its maturity date. This can be a disadvantage for investors if interest rates fall after they purchase the bond, as the government may call the bond and reissue it at a lower interest rate.
• Market risk: Even though treasury securities are generally considered low-risk, they are not entirely immune to market fluctuations. Economic events or changes in investor sentiment can cause the prices of Treasury securities to fluctuate.
• Regulatory risk: Changes in government regulations can impact the investment environment for Treasury securities. For example, changes in tax laws or monetary policy can affect the attractiveness of treasury securities.

T-bills, notes, or bonds –  which one should an investor choose?

Investors must consider several factors when deciding whether to invest in treasury bills, notes, or bonds. First, evaluate investment goals: short-term needs align well with treasury bills, while intermediate-term goals like a down payment might be advantageous from treasury notes. Long-term investments seeking stable income can lean towards treasury bonds.

Second, assess the risk tolerance. Treasury bills are generally the least risky, while notes and bonds offer moderate and higher levels of risk, respectively. Third, factor in interest rate expectations. Rising rates might favor short-term bills while falling rates could help with long-term bonds. 

Fourth, consider the economic outlook—treasury securities can help during uncertain times, but economic conditions can influence interest rates and market performance. Finally, evaluate the tax situation. While treasury securities offer state and local tax advantages, federal income tax applies. By carefully weighing these factors, investors can decide which treasury security suits their overall financial objectives.