Treasury notes are obligations of the U.S. government and are widely used as benchmarks for interest rates, portfolio diversification, and intermediate-term fixed-income exposure.
Key Takeaways
- Intermediate maturity: Treasury notes generally mature in more than one year through 10 years.
- Fixed coupon: Interest is generally paid every six months.
- Price moves with market rates: Existing note prices can rise when rates fall and fall when rates rise.
- Marketable: Notes can be sold before maturity in the secondary market.
How Treasury Notes Pay Investors
The Treasury sets a fixed coupon rate for each note, and interest is paid semiannually. At maturity, the holder receives the note’s face value, assuming the Treasury meets its obligations.
Maturities, Coupons, and Yield
Treasury notes are issued in standard intermediate maturities. They sit between short-term Treasury bills and long-term Treasury bonds in the maturity spectrum.
Longer notes generally respond more strongly to interest-rate changes than shorter notes because investors are locked into the stated coupon for a longer period.
Coupon Rate vs. Yield
The coupon rate determines the dollar interest payment based on face value. Yield measures the return relative to the market price an investor pays.
A note purchased below face value can have a yield above its coupon rate, while one purchased above face value can have a lower yield.
Price Risk and Selling Before Maturity
Existing fixed-rate notes become less attractive when new market rates rise, so their prices generally fall. When market rates decline, older notes with higher coupons can become more valuable.
Inflation expectations, Federal Reserve policy, economic growth, and demand for safe assets can all influence Treasury yields.
Treasury Notes vs. Bills and Bonds
| Security | Maturity | Interest pattern |
|---|---|---|
| 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 | Fixed semiannual coupon |
Holding to Maturity vs. Selling Early
An investor who holds to maturity receives the scheduled principal amount regardless of interim market-price fluctuations, subject to credit risk. Selling early exposes the investor to the current market price.
Tax Treatment and Portfolio Role
Interest from Treasury notes is subject to federal income tax but generally exempt from state and local income taxes. Capital gains or losses from secondary-market sales can follow separate tax rules.
After-tax comparisons with corporate or municipal bonds should therefore consider both yield and the investor’s federal and state tax situation.
Role in a Portfolio
Treasury notes can provide income, portfolio ballast, and a maturity that is less sensitive to rate changes than long-term bonds but offers more duration than T-bills. They are often used as reference points for pricing mortgages, corporate bonds, and other credit products.
Different note maturities can also be combined in a bond ladder to spread reinvestment dates and manage the tradeoff between current yield and interest-rate sensitivity.