Treasury Bills vs. Bonds vs. Notes
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
The U.S. government offers several debt securities that have low risk and can help diversify your investment portfolio. Whether looking for a short-, medium- or long-term investment, you can choose from Treasury bills, Treasury notes, and Treasury bonds. In this guide, we help you understand the differences and pros and cons of each.
Jump To
What are Treasury bills?
Treasury bills, often called T-bills, are short-term debt securities issued by the U.S. Department of the Treasury to finance the federal government's operations and manage its cash flow. They are considered one of the safest investments available because the full faith and credit of the U.S. government backs them.
Features of Treasury bills
Maturity
T-bills have a maturity period that typically ranges from a few days to one year. The most common maturities are four weeks (28 days), 13 weeks (91 days), and 26 weeks (182 days). There are also longer-term Treasury securities, but those are not considered T-bills.
No interest payments
Treasury bills do not make periodic interest payments, unlike most bonds and notes. Instead, they are sold at a discount to their face value, and the investor receives the face value when the bill matures. The difference between the purchase price and the face value represents the investor's return.
Discount pricing
T-bills are sold at a price below their face value, known as the "discount." The difference between the face value and the purchase price is the interest earned on the investment. Investors receive the face value when the T-bill matures.
Competitive and non-competitive bidding
When Treasury bills are auctioned, investors can submit competitive or non-competitive bids. Non-competitive bids are guaranteed to be filled at the yield determined by the auction, while competitive bids specify the desired yield, and the Treasury fills them based on the highest accepted yields until the offering amount is met.
Liquidity
T-bills are highly liquid investments. They can be bought and sold in the secondary market before they mature, allowing investors to access their funds if needed.
Taxation
Interest income from Treasury bills is subject to federal income tax but exempt from state and local taxes. This can make T-bills particularly attractive for investors seeking a safe, tax-efficient investment.
Use as a risk-free benchmark
Treasury bills are often used as a benchmark for determining the risk-free rate of return in financial markets. Other interest rates, such as mortgage rates and corporate bond yields, are often quoted with T-bill yields.
Pros and cons
Pros
- Safety. Treasury bills are considered one of the safest investments available because they are backed by the government. There is virtually no risk of default.
- Liquidity. T-bills are highly liquid and can be easily bought and sold in the secondary market before their maturity date. This makes them a flexible investment choice.
- Predictable Returns. T-bills offer a fixed interest rate, which means you know exactly how much you will earn when the bill matures. This predictability can be attractive to investors seeking stable returns.
- Diversification. T-bills can be used as a component of a diversified investment portfolio to help reduce overall risk.
- Tax Benefits. The interest income from Treasury bills is exempt from state and local taxes, making them more tax-efficient for certain investors.
- Low Minimum Investment. T-bills are accessible to a wide range of investors because they typically have low minimum investment requirements.
Cons
- Low Yields. Treasury bills tend to offer lower yields compared to other fixed-income investments such as corporate bonds or municipal bonds. This means they may not provide as much income potential.
- Interest Rate Risk. If you hold T-bills and interest rates rise, the market value of your existing T-bills may decline, although this risk is less significant for short-term bills.
- Inflation Risk. T-bills may not keep pace with inflation, meaning that your purchasing power could erode if inflation outpaces the yield on your T-bills.
- Short-Term Investment.T-bills have relatively short maturities, typically ranging from a few days to one year. If you're looking for a long-term investment, T-bills may not be suitable.
- No Regular Income. T-bills do not provide regular interest payments. Instead, you receive the interest when the bill matures. This lack of regular income may not suit investors seeking periodic cash flow.
- Market Risk. While T-bills are considered low risk, their prices can still fluctuate in the secondary market based on changes in interest rates and investor demand. However, this risk is generally lower than that of other investments.
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
What are Treasury notes?
Treasury notes, often called T-notes, are medium- to long-term debt securities issued by the U.S. Department of the Treasury to finance the federal government's operations and manage its debt. They are similar to Treasury bills (T-bills) but have longer maturities and different characteristics.
Features of Treasury notes
Maturity
Unlike T-bills, which have one year or less maturities, Treasury notes typically range from two to ten years. This makes T-notes suitable for investors looking for a longer-term investment with a fixed interest rate.
Interest payments
Treasury notes make semiannual interest payments to investors. These payments represent a fixed percentage of the note's face value and are known as the "coupon rate." The coupon rate is determined at the time of issuance and remains fixed throughout the life of the note.
Face value
When a T-note matures, the investor receives the full face value of the note, which is also known as the "par value" or "principal amount." This is in addition to the interest payments received over the life of the note.
Market price fluctuations
The market price of Treasury notes can fluctuate in response to changes in interest rates. When interest rates rise, the market price of existing T-notes falls, and vice versa. However, if an investor holds a T-note until maturity, they will receive the full face value regardless of market price fluctuations.
Taxation
Interest income from Treasury notes is subject to federal income tax, but it is exempt from state and local taxes, making them attractive to investors seeking tax-efficient income.
Use as benchmark
Treasury notes are often used as benchmark securities to gauge interest rate movements in the broader financial markets. The yields on T-notes are used as reference rates for various financial products, including mortgages and corporate bonds.
Auctions
Treasury notes are typically sold through competitive bidding at regularly scheduled auctions. Investors can submit bids specifying the yield they are willing to accept, and the Treasury fills orders starting with the lowest yields until the auctioned amount is met.
Pros and cons
Pros
- Safety. T-notes are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. The risk of default is extremely low.
- Fixed Interest Payments. T-notes pay a fixed interest rate semiannually, providing investors with a predictable and regular income stream. This can be appealing for income-focused investors.
- Intermediate-Term Investment. T-notes offer a middle ground between the shorter-term Treasury bills and the longer-term Treasury bonds. They can be suitable for investors with intermediate-term financial goals.
- Liquidity. T-notes can be bought and sold in the secondary market, which provides investors with a degree of liquidity. However, they are less liquid than Treasury bills.
- Diversification. Including T-notes in a diversified investment portfolio can help reduce overall portfolio risk, as they tend to have lower volatility compared to some other asset classes.
- Tax Benefits. The interest income from T-notes is exempt from state and local taxes, making them more tax-efficient for certain investors.
Cons
- Lower Yields. T-notes typically offer lower yields compared to riskier assets like corporate bonds or equities. In a low-interest-rate environment, this can result in lower returns.
- Interest Rate Risk. Existing T-note prices can be sensitive to changes in interest rates. If rates rise, the market value of your T-notes may decline.
- Inflation Risk. T-notes may not provide strong protection against inflation. The fixed interest payments may not keep pace with rising prices, potentially eroding your purchasing power.
- Intermediate Commitment. Investing in T-notes involves locking up your capital for an intermediate period, which may not be suitable for investors seeking short-term liquidity or flexibility.
- Reinvestment Risk. If you rely on the interest income from T-notes and interest rates decline when your notes mature, you may have to reinvest at lower rates, potentially reducing your income.
- No Equity Participation. T-notes do not provide investors with an ownership stake in a company, meaning you won't benefit from capital appreciation or dividends.
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
What are Treasury bonds?
Treasury bonds, often called T-bonds, are long-term debt securities issued by the U.S. Department of the Treasury to raise funds for various government initiatives and manage the national debt. They are one of the safest investments available, backed by the full faith and credit of the U.S. government.
Features of Treasury bonds
Maturity
Unlike Treasury bills (T-bills) and Treasury notes (T-notes), which have shorter maturities, Treasury bonds have relatively long maturities. They typically come with maturities ranging from 10 to 30 years. This makes T-bonds suitable for investors looking for a stable, long-term investment with a predictable income stream.
Interest payments
Treasury bonds pay semiannual interest payments to investors. These interest payments, known as "coupon payments," are based on a fixed interest rate determined at the time of issuance. The coupon rate remains constant throughout the life of the bond.
Face value
When a Treasury bond matures, the investor receives the full face value of the bond, which is also known as the "par value" or "principal amount." This is in addition to the interest payments received over the bond's life.
Market price fluctuations
The market price of Treasury bonds can fluctuate in response to changes in prevailing interest rates. When interest rates rise, the market price of existing T-bonds tends to fall, and vice versa. However, investors who hold T-bonds until maturity are guaranteed to receive the full face value.
Taxation
Interest income from Treasury bonds is subject to federal income tax, but it is exempt from state and local taxes, making it attractive to investors seeking tax-efficient income.
Use as benchmark
Treasury bonds are frequently used as benchmark securities to assess interest rate movements in the broader financial markets. T-bond yields are used as reference rates for various financial products, including mortgages and corporate bonds.
Auctions
Treasury bonds are typically sold through competitive bidding at regularly scheduled auctions. Investors can submit bids specifying the yield they are willing to accept, and the Treasury fills orders starting with the lowest yields until the auctioned amount is met.
Related: I Bonds vs. Certificate of Deposits
Pros and cons
Pros
- Safety. Treasury bonds are backed by the full faith and credit of the U.S. government, making them one of the safest investments in the world. The risk of default is virtually nonexistent.
- Fixed Interest Payments. T-bonds pay a fixed interest rate semiannually, providing investors with a predictable income stream. This can be especially attractive for retirees and income-focused investors.
- Long-Term Investment. T-bonds have longer maturities, which can help investors with long-term financial goals, such as retirement planning or funding education expenses.
- Liquidity. While not as liquid as Treasury bills, T-bonds can still be bought and sold in the secondary market, offering a degree of liquidity.
- Diversification. T-bonds can be a valuable component of a diversified investment portfolio, helping to reduce overall portfolio risk.
- Tax Benefits. The interest income from Treasury bonds is exempt from state and local taxes, making them more tax-efficient for certain investors.
Cons
- Low Yields. Treasury bonds typically offer lower yields compared to riskier assets like corporate bonds or stocks. This can result in lower overall returns, especially in a low-interest-rate environment.
- Interest Rate Risk. The prices of existing Treasury bonds can be sensitive to changes in interest rates. If interest rates rise, the market value of existing bonds may decline.
- Inflation Risk. T-bonds may not provide adequate protection against inflation. The fixed interest payments may not keep pace with rising prices, potentially eroding purchasing power.
- Long-Term Commitment. Investing in T-bonds involves tying up your money for a relatively long period, which may not be suitable for investors seeking short-term liquidity or flexibility.
- Reinvestment Risk. If you rely on the interest income from T-bonds and interest rates decline when your bonds mature, you may have to reinvest at lower rates, potentially reducing your income.
- No Equity Participation. Unlike stocks, T-bonds do not provide investors with an ownership stake in a company, meaning you won't benefit from capital appreciation or dividends.
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
Key differences
T-bills, T-notes, and T-bonds are all debt securities issued by the U.S. Department of the Treasury but differ in maturity, interest payments, and investment characteristics. Here are the key differences between these three types of U.S. Treasury securities:
Maturity
- T-bills. T-bills have the shortest maturity among the three. They typically have maturities ranging from a few days to one year, with common maturities of 4 weeks (28 days), 13 weeks (91 days), and 26 weeks (182 days).
- T-notes. T-notes have intermediate-term maturities, typically ranging from 2 to 10 years.
- T-bonds. T-bonds have the longest maturities, usually ranging from 10 to 30 years.
Interest payments
- T-bills. No interest payment to investors.
- T-notes. T-notes make semiannual interest payments to investors, known as coupon payments. These payments are based on a fixed coupon rate specified at the time of issuance and remain constant over the life of the note.
- T-bonds. T-bonds, like T-notes, also make semiannual interest payments based on a fixed coupon rate. The coupon rate remains constant throughout the life of the bond.
Term
- T-bills. Short-term, with maturities of one year or less.
- T-notes. Medium-term, with maturities typically ranging from 2 to 10 years.
- T-bonds. Long-term, with maturities usually ranging from 10 to 30 years.
Purpose
- T-bills. Investors often use T-bills for short-term cash management and liquidity needs. They suit those looking for a safe, temporary place to park funds.
- T-notes. T-notes are commonly used by investors seeking a fixed-rate, medium-term investment with a predictable income stream. They are also used as benchmarks for interest rates in the financial markets.
- T-bonds. T-bonds are preferred by investors looking for a long-term, fixed-rate investment and a stable income stream. They are also used as benchmark securities for assessing interest rate trends.
Market price volatility
- T-bills. T-bills have minimal price volatility since they do not pay periodic interest and are redeemed at face value.
- T-notes and T-bonds. The market prices of T-notes and T-bonds can fluctuate based on changes in interest rates. When rates rise, bond prices tend to fall, and vice versa. However, if held to maturity, investors receive the full face value regardless of market price fluctuations.
The bottom line
In summary, the primary differences between T-bills, T-notes, and T-bonds are their maturities, interest payment structures, and suitability for different investment goals. T-bills are short-term, discount securities, T-notes are medium-term with fixed interest payments, and T-bonds are long-term with fixed interest payments. Each serves specific needs in the financial markets and can be chosen based on an investor's investment horizon and objectives.
T-bills are "better" than T-notes for short-term, risk-averse investors who prioritize capital preservation and liquidity. However, the choice ultimately depends on your investment objectives and time horizon. Many investors use a combination of Treasury securities and other assets to build a diversified investment portfolio that aligns with their financial plan.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Share this article
