Understanding Treasury Notes
A Treasury note (T-note) is a marketable U.S. government debt security with a fixed interest rate and a maturity between two and 10 years.
Treasury notes are available from the government with either a competitive or noncompetitive bid. With a competitive bid, investors specify the yield they want, running the risk that their bid may not be approved. With a noncompetitive bid, investors accept whatever yield is determined at auction.
Key Takeaways
- A Treasury note is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years.
- Treasury notes are available via competitive bids, where an investor specifies the yield, or non-competitive bids, where the investor accepts whatever yield is determined.
- Treasury notes are different from Treasury bonds primarily in maturity—as Treasury bonds typically mature in 20 to 30 years.
Unveil the Value of Issued Maturities
Issued in maturities of two, three, five, seven, and 10 years, Treasury notes are popular investments characterized by high liquidity in the secondary market.
Interest payments on the notes are made every six months until maturity. The income from these interest payments is not taxable at the municipal or state level but is subject to federal taxation, similar to a Treasury bond or a Treasury bill.
Treasury notes, bonds, and bills represent investments in debt issued by the U.S. Treasury, differing mainly in their length of maturity. Treasury bonds have longer maturities exceeding 10 years, up to 30 years, making them the longest-dated, sovereign fixed-income securities.
Navigating Treasury Notes and Interest Rate Risk
The longer its maturity, the higher a T-note’s exposure to interest rate risks. Beyond credit strength, a note or bond’s value is determined by its sensitivity to fluctuations in interest rates. Rate changes can occur either through central bank policies or yield curve shifts.
Fixed-income instruments show varying levels of sensitivity to rate changes, meaning price drops occur at different magnitudes. This sensitivity is measured by duration and expressed in years. Duration factors include coupons, yield, present value, final maturity, and call features.
For example, an absolute shift in interest rates took place in December 2015 when the Federal Reserve raised the federal funds rate by 25 basis points. This moved the rate from the range of 0%-0.25% to 0.25%-0.50%, decreasing the prices of all outstanding U.S. Treasury notes and bonds.
Special Considerations for Investors
Beyond benchmark interest rate adjustments, factors like changing investor expectations create shifts in the yield curve, known as yield curve risk. This risk pertains to steepening or flattening of the yield curve due to yield changes in similar bonds of different maturities.
For instance, with a steepening curve, the spread between short- and long-term interest rates widens as long-term rates increase faster than short-term rates. Conversely, in an inverted yield curve situation, short-term rates exceed long-term rates.
Thus, the prices of long-term notes decrease relative to short-term notes. This scenario reverses in the case of a flattening yield curve, where the spread narrows, leading to a decrease in short-term note prices relative to long-term notes.
Related Terms: Treasury bond, Treasury bill, U.S. Treasury, secondary market, liquidity.
References
- U.S. Department of the Treasury. “Treasury Notes: FAQs”.
- U.S. Department of the Treasury. “Treasury Bonds: FAQs”.
- U.S. Department of the Treasury. “Treasury Securities & Programs”.
- U.S. Department of the Treasury. “Treasury Notes: Tax Considerations”.
- U.S. Federal Reserve Board. “Open Market Operations”.
