Understanding U.S. Treasury Securities: Bills, Notes, and Bonds Explained

What Are U.S. Treasury Securities?

U.S. Treasury securities are debt instruments issued by the federal government to finance its activities and obligations. These instruments are considered one of the safest investments in the market, primarily because they are backed by the full faith and credit of the U.S. government. Among the most popular Treasury securities are Treasury bills, notes, and bonds, each differing in terms of maturity, interest rates, and investment goals.

Differences Between Treasury Bills, Notes, and Bonds

Treasury bills (T-bills), notes (T-notes), and bonds (T-bonds) vary significantly in terms of their maturity periods and payment structures. T-bills are short-term securities that have maturities of one year or less. They are sold at a discount and do not pay interest in a traditional sense; instead, the investor receives the face value at maturity.

T-notes, on the other hand, have maturities ranging from two to ten years. They pay interest semi-annually, which makes them an attractive option for investors seeking regular income over a moderate period. Finally, T-bonds have the longest maturities, typically ranging from ten to thirty years. Just like T-notes, they provide semi-annual interest payments throughout their lifespan.

Similarities Between the Different Types of Treasury Securities

Despite their differences, Treasury bills, notes, and bonds share several common features. All are exempt from state and local taxes, making them an appealing choice for investors aiming to maximize their returns. Additionally, they all offer the same security of repayment, ensuring that the principal and interest will be paid as scheduled. These securities can also be easily bought and sold in the secondary market, providing liquidity to investors.

Moreover, all Treasury securities are issued via auction, where the competitive and non-competitive bidding systems allow both institutional and individual investors to participate. This process ensures fair pricing and accessibility for all types of investors, further solidifying the appeal of these options as robust investment vehicles.

In summary, while U.S. Treasury bills, notes, and bonds serve different investment strategies due to their varying maturities and payment structures, they offer common advantages that make them a cornerstone of many investment portfolios. Understanding these differences and similarities can assist potential investors in making informed decisions about which security aligns best with their financial goals and timelines.

Key Considerations for Retirees

• Tax Efficiency: Interest from U.S. Treasuries is exempt from state and local taxes, but it is subject to federal income tax. You may choose to hold them in a taxable account for this reason, or within a tax-deferred retirement account like an IRA.

• Interest Rate Risk: In a rising rate environment, the market value of your existing bonds decreases. Consider using a "bond ladder" strategy (buying bonds with staggered maturity dates) to manage this risk.

• Time Horizon: Match the bond's maturity to your income needs. If you need the principal in 5 years, buy a 5-year note.

How to Buy Treasury Bonds

You have two primary options for purchasing Treasury securities:

• Directly from the U.S. Government: Use the official website, TreasuryDirect.gov

• Through a Brokerage Firm: Purchase new or existing bonds via your online brokerage account (e.g. Fidelity, Schwab, Vanguard).

Vanguard Intermediate-Term Treasury ETF (VGIT) or Ultra-Short ETF (VGUS) are options. iShares 1-3 Year Treasury Bond ETF (SHY) or Ultra-Short (SGOV) are examples of highly rated, low-cost options that balance yield and risk.