Treasury bills, Treasury notes, and Treasury bonds are often grouped together as though they are interchangeable. All are marketable debt securities issued by the U.S. Treasury. Their maturities and payment structures create meaningfully different investment experiences.
Treasury bills are the short end
Treasury bills mature within one year.
TreasuryDirect currently lists maturities including 4, 6, 8, 13, 17, 26, and 52 weeks.
Traditional T-bills do not pay a regular coupon in the same way Treasury notes do.
An investor may purchase a bill below its face amount and receive the full face value at maturity.
Suppose someone pays $980 for a bill that will pay $1,000 at maturity. The $20 difference represents the investor's interest income.
Bills can be useful for money that has a relatively short time horizon because their maturity dates can be matched to future needs.
Treasury notes cover the middle
Treasury notes are currently issued with maturities of 2, 3, 5, 7, or 10 years.
They generally pay fixed interest every six months.
At maturity, the investor receives the principal amount.
Because notes remain outstanding much longer than bills, their market prices can be more sensitive to changing interest rates.
A ten-year note purchased today might become significantly more or less valuable in the secondary market as market yields change.
Someone holding it until maturity faces a different experience from someone planning to sell after two years.
Treasury bonds go much longer
Treasury bonds are issued with 20-year or 30-year maturities and also pay interest every six months.
Long maturities make them particularly sensitive to changes in interest rates.
A small shift in long-term yields can produce a significant movement in the price of a 30-year bond.
This surprises investors who assume government debt should have almost no volatility.
Again, credit risk and market-price risk are different concepts.
What about TIPS?
Treasury Inflation-Protected Securities add another feature.
Their principal adjusts based on changes in the Consumer Price Index.
TIPS are issued with 5-year, 10-year, or 30-year maturities.
The structure is designed to protect purchasing power against inflation more directly than a conventional fixed-principal Treasury security.
TIPS still carry market-price risk if they are sold before maturity.
They also have tax considerations that investors should understand before purchasing them in taxable accounts.
And floating-rate notes?
Treasury Floating Rate Notes, or FRNs, currently have two-year terms.
Their interest payments adjust based on rates associated with 13-week Treasury bills.
Interest is paid quarterly.
Because the rate adjusts, their interest-rate behavior differs from that of a conventional fixed-rate note.
Why maturity matching can matter more than chasing yield
Suppose someone needs $20,000 for college tuition twelve months from now.
Buying a 30-year Treasury bond because it offers a slightly higher yield could introduce unnecessary market risk.
If long-term yields rise sharply during the year, the bond's market value could fall before tuition is due.
A 52-week Treasury bill could align far more closely with the actual liability.
This idea is called matching assets with liabilities.
Professional investors use versions of the same concept when managing pension obligations and insurance portfolios.
Personal finance can use it too.
The best investment for a financial goal is influenced by when the money will be needed.
One issuer, several risk profiles
Every instrument discussed here represents an obligation of the U.S. Treasury.
That does not make their financial behavior identical.
A four-week bill is primarily a short-term cash-management instrument.
A thirty-year bond makes a much larger bet on the future path of interest rates and inflation.
Understanding maturity can therefore be just as important as understanding who issued the security.
Sources
- U.S. Treasury, TreasuryDirect, Treasury bills.
- U.S. Treasury, TreasuryDirect, Treasury notes and other marketable securities.