Skip to main content

What Are Treasury Bonds and How Do They Work?

Treasury bonds are fixed-income securities that are essentially loans from citizens to the U.S. government that are paid back with interest.
Darkened photo of a treasury bond from the 60s with text overlay that reads "What Is a Treasury Bond?"

Treasury bonds are low-risk investments, but they also offer a comparatively low yield compared to other types of securities. 

What Is a Treasury Bond?

Treasury bonds (T-bonds) are debt obligations issued and backed by the full faith and credit of the U.S. government. They are essentially loans from citizens to the government upon which interest is paid at regular intervals before the principal is eventually returned to the citizen upon the bond’s maturity.

Because T-bonds are considered to have low credit or default risk, they generally offer lower yields relative to other bonds, such as corporate or municipal bonds. The 30-year Treasury bond is the longest-maturity Treasury security. Its closest rival is the 10-year Treasury note.

Note: T-bonds and U.S. savings bonds are two completely different things.

The three main types of Treasury securities are T-bonds, T-notes, and T-bills. All three are traded in a highly liquid secondary market, known as the fixed-income market (more commonly known as the bond market). The term “fixed income” means that Treasury bonds deliver a fixed interest rate payout, paid to investors every six months.

The interest paid on Treasury securities provides a nearly guaranteed source of income. However, the interest rate (or yield) on a 30-year T-bond is typically in the same range as the interest rate for a high-yield savings account even though the money in a high-yield savings account can be much easier and quicker to access. A T-bond also is different from a money market account because of the T-bond’s much longer term.

Information about the purchase, redemption, replacement, and valuation of T-bonds and other Treasury securities is available at TreasuryDirect.gov, which is managed by the U.S. Bureau of the Fiscal Service.

Is a T-Bond a Good Investment?

T-bonds and related government securities are often purchased by investors seeking a safe haven, as many do during periods of volatility in the market. This can include investors who want an anchor for riskier investments in their portfolio and investors who are close to retirement and want to reduce the overall risk in their portfolio. T-bonds are less attractive during times of inflation because of their characteristically low interest rates and longer terms.

Where Can I Buy T-Bonds?

Treasury securities are available both through the U.S. Treasury and from private financial services firms.

To purchase directly from the Treasury, set up an account at TreasuryDirect.gov. Then you can bid at one of the regularly held auctions. The minimum purchase is $100 (even though T-bonds have a face value of $1,000).

Financial institutions, such as banks or brokerage firms, each set their own minimum buy-in, so you might need to invest more than $100 at a time. Buying through a financial institution is a good way to access a T-bond mutual fund or a T-bond ETF (exchange-traded fund).

How Do T-Bond Auctions Work?

T-bond auctions are held four times a year, on the first Wednesday of February, May, August, and November.

TheStreet Dictionary Terms

At the auction, there are two ways to place a bid:

  1. Non-Competitive Bidding: You agree to accept whatever (fixed) interest rate is decided at the auction. In exchange, you're guaranteed to have your bid accepted, and you'll be paid face value if you hold the T-bond to maturity.
  2. Competitive Bidding: You can specify the (fixed) interest rate you want to receive, but your bid will only be accepted if your specified rate is less than or equal to the rate set by the auction.

Where Can I Sell a T-Bond?

45 or more days after your original purchase, you can sell a T-bond on the secondary market through a financial institution, such as a bank or brokerage firm. Keep in mind that the bond’s price can be discounted, par (what you paid for it), or set at a premium depending on the economic conditions when you choose to sell.

How Often Do T-Bonds Pay Interest?

T-bonds pay interest every six months at the original (fixed) interest rate that was set at the time of purchase. For instance, if you purchase a $1,000 T-bond at 2 percent interest (also referred to as a 2 percent coupon), you’ll earn a $20 annual return from that T-bond. This translates into a $10 payment to you every six months.

Is T-Bond Interest Taxable?

In general, you only pay federal tax on T-bond interest; the interest is exempt from state and local taxes. However, keep in mind that you might be taxed on any gains you earn over the original principal amount. The amount of interest you earn on your T-bond each year is reported on tax form 1099 or 1099-INT.

What Happens When a T-Bond Matures?

You can redeem mature T-bonds at TreasuryDirect.gov for full face value. You can also redeem through a financial institution such as a credit union or brokerage firm.

What Are the Different Types of U.S. Government Securities?

The three basic types of Treasury securities are Treasury bonds (T-bonds), Treasury notes (T-notes), and Treasury bills (T-bills). Technically, all three types are bonds, but the federal government uses the term “Treasury bonds” for its 30-year instruments.

T-bonds have original maturities of either 20 or 30 years and typically offer the highest interest rates of the three basic securities. (The 20-year T-bond is no longer offered but can be purchased on the secondary market.) Interest payments are made twice a year.

T-notes have original maturities that range from two to 10 years and also pay interest twice a year. T-bills have the shortest time to maturity, with lengths ranging from four weeks to one year. T-bills are sold at a discount to the face value of the bond, so investors earn the difference at maturity (in a lump-sum interest payment).

Additional types of government securities include Treasury inflation-protected securities (TIPS), floating-rate notes (FRNs), and Separate Trading of Registered Interest and Principal of Securities (STRIPS).

What Determines the T-Bond Rate?

The T-bond rate, or yield, fluctuates with both overall market conditions and demand. The U.S. Treasury offers a wealth of information about both rates and yield curves for T-bonds, T-notes, and T-bills.

Is T-Bond Yield Used as a Benchmark?

The 10-year T-note (rather than the 30-year T-bond) is typically used as the U.S. benchmark, meaning that people look to its yield as a proxy for all U.S. interest rates.

What Are the Pros of T-Bonds?

  • Credit Quality: Treasury securities are backed by the U.S. government, so they're generally considered to be of the highest credit quality. In other words, the risk of default is extremely low.
  • Tax Advantages: The interest you earn is subject to federal income taxes but not state or local income taxes. However, you may have to pay taxes on principal gains.
  • Liquidity: Investors can buy and sell Treasury securities both at regularly scheduled auctions and in the secondary market. The exact price depends on the coupon rate compared with prevailing interest rates.

What Are the Cons of T-Bonds?

  • Low Yield: You'll typically earn less interest on Treasuries compared with other, riskier investments.
  • Tax Considerations: If you buy a bond at discount and either hold it until maturity or sell it at a profit, that principal gain will be subject to federal and state taxes.
  • Interest Rate Risk: Keep in mind that as interest rates rise, the value of your existing bond holdings will fall. This is the very essence of interest rate risk. Like all long-term bonds, T-bonds carry a significant risk that interest rates will rise during a given 30-year period.
  • Inflation Risk: The interest earned on T-bonds may not keep pace with inflation, particularly over a 30-year period.