Treasury notes

3 key takeaways

• Treasury notes are medium-term debt securities issued by the U.S. government with maturities ranging from two to ten years.
• They pay interest semiannually and are considered low-risk investments due to government backing.
• Treasury notes are a key tool for funding government operations and managing national debt.

What are Treasury notes?

Treasury notes (T-notes) are a type of government bond issued by the U.S. Department of the Treasury. They are debt securities that pay a fixed interest rate every six months until maturity, at which point the face value of the note is repaid to the holder. T-notes are issued with maturities of two, three, five, seven, or ten years.

Characteristics of Treasury notes

Treasury notes have several key characteristics:

• Maturity: Treasury notes have maturities ranging from two to ten years. This intermediate-term maturity distinguishes them from Treasury bills (short-term) and Treasury bonds (long-term).
• Interest payments: T-notes pay interest semiannually at a fixed rate, providing a predictable income stream for investors.
• Face value: The face value, or principal, of a T-note is repaid in full at maturity.
• Marketability: T-notes are highly liquid and can be bought and sold in the secondary market, providing flexibility for investors.
• Safety: Backed by the full faith and credit of the U.S. government, T-notes are considered one of the safest investments available.

How Treasury notes work

When investors purchase a Treasury note, they are essentially lending money to the U.S. government. In return, the government agrees to pay periodic interest (coupon payments) and return the principal amount at the end of the note’s term. Here’s how they work in practice:

1. Issuance: Treasury notes are sold at auction by the U.S. Treasury. Investors can participate in these auctions directly or through financial institutions.
2. Interest payments: The fixed interest rate, set at the time of issuance, is paid semiannually to the note holder.
3. Maturity: At the end of the note’s term, the government repays the face value of the note to the holder.

Investment considerations

Investors consider several factors when investing in Treasury notes:

• Yield: The yield on a Treasury note reflects the return an investor will earn, considering the purchase price, coupon rate, and time to maturity. It is an important measure for comparing T-notes to other investments.
• Interest rate risk: As with all fixed-income securities, the value of T-notes can fluctuate with changes in interest rates. When interest rates rise, the value of existing T-notes typically falls, and vice versa.
• Inflation risk: The fixed interest payments from T-notes may lose purchasing power in times of high inflation.

Examples of Treasury notes

Treasury notes are issued in various maturities, providing options for different investment time horizons:

• 2-year T-notes: These short-term notes are often used by investors seeking a relatively safe and liquid investment with a moderate yield.
• 5-year T-notes: These notes offer a balance between yield and interest rate risk, suitable for medium-term investment goals.
• 10-year T-notes: These are among the most commonly tracked securities in the financial markets, often used as a benchmark for long-term interest rates.

Role in the economy

Treasury notes play a crucial role in the U.S. economy:

• Government funding: T-notes provide a significant source of funding for federal government operations and projects, helping to finance everything from infrastructure to social programs.
• Monetary policy: The yield on Treasury notes is closely watched as an indicator of market expectations for interest rates and economic conditions. Central banks and policymakers use this information in their decision-making processes.

Understanding Treasury notes is essential for investors, policymakers, and financial analysts. For further exploration, topics such as bond pricing, the relationship between bond yields and interest rates, and the role of government debt in the economy provide deeper insights into the significance and functioning of Treasury notes.