Treasury bonds are obligations of the U.S. government and are commonly used for long-term income, liability matching, diversification, and interest-rate exposure.
Key Takeaways
- Long maturity: Treasury bonds extend beyond the maturity range of bills and notes.
- Fixed semiannual interest: Coupon payments are generally made twice a year.
- High rate sensitivity: Long maturity makes bond prices especially responsive to changes in market yields.
- Marketable: Investors can sell before maturity, but the sale price can be above or below face value.
How Treasury Bonds Pay Investors
The bond’s coupon rate determines the fixed interest paid on face value. Interest is paid every six months until maturity, and principal is repaid when the bond matures.
Interest-Rate and Inflation Risk
A long-term fixed coupon becomes more or less attractive as new market rates change. When rates rise, existing bond prices generally fall; when rates decline, prices generally rise.
Because Treasury bonds lock in cash flows for many years, the price response is generally larger than for a short Treasury bill or intermediate-term note.
Coupon Rate, Yield, and Market Price
Coupon rate is fixed at issuance, while yield changes with the market price paid by investors. A bond trading below face value generally offers a yield above its coupon rate, while a premium-priced bond generally has a lower yield.
Yield to maturity incorporates coupon payments, purchase price, time to maturity, and repayment of principal under stated assumptions.
Treasury Bonds vs. Bills and Notes
| Security | Maturity profile | Interest |
|---|---|---|
| Treasury bill | One year or less | Generally discount-based |
| Treasury note | More than one year through 10 years | Fixed semiannual coupon |
| Treasury bond | Long-term, generally more than 10 years | Fixed semiannual coupon |
Inflation Risk
A nominal Treasury bond promises fixed dollar payments, so unexpected inflation can reduce the purchasing power of those cash flows. Investors who need explicit inflation adjustment can compare Treasury Inflation-Protected Securities rather than ordinary nominal bonds.
Inflation expectations also influence market yields, which can move bond prices before maturity.
Tax Treatment and Portfolio Role
Treasury bond interest is subject to federal income tax but generally exempt from state and local income taxes. A sale before maturity can also create a capital gain or loss depending on price and basis.
That state-tax exemption can make the after-tax yield compare differently with corporate bonds for investors in higher-tax states.
When Treasury Bonds Can Fit
Long-term Treasuries can fit investors seeking predictable nominal income, duration exposure, or assets that may respond differently from stocks during some market environments.
The tradeoff is sensitivity to inflation and interest-rate changes. Investors with near-term cash needs can face meaningful losses if forced to sell during a period of higher yields.