Treasury Bonds vs. Treasury Notes vs. Treasury Bills

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Edited by

Cindy Perman

Published on July 19, 2024 | 4 min read

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The terms Treasury note, Treasury bond and Treasury bill may sound like the same thing, but each has a subtle difference from the others: their maturity length. Each of these Treasury securities is a promise from the U.S. federal government to repay a loan to the security holder, but the key difference lies in when the owner receives their principal back.

Here’s what Treasury bonds, notes and bills are – and their key similarities and differences.

What is a Treasury bill?

Treasury bills (or T-bills) are one type of Treasury security issued by the U.S. Department of the Treasury to fund government operations. They usually have maturities of four, eight, 13, 17, 26 and 52 weeks. T-bills are issued only electronically, meaning there is no paper T-bill.

What is a Treasury note?

Treasury notes (or T-notes) are another type of Treasury security used to fund the government. They have maturities of two, three, five, seven or 10 years.

What is a Treasury bond?

Treasury bonds (or T-bonds) are a third major type of Treasury security issued to fund the government. They have maturities of 20 or 30 years.

Treasury bonds vs. notes vs. bills: Key differences

Here’s how Treasurys compare across three key dimensions.

Maturity

The most significant difference among Treasurys is their maturity.

T-bills are issued in maturities of a year or less.
T-notes are issued in maturities of two to 10 years.
T-bonds are issued in maturities of 20 or 30 years.

Interest

How Treasurys accrue and pay interest differs slightly among these types of securities.

T-notes and T-bonds pay interest to their owners twice a year, as most bonds typically do.

In contrast, T-bills are sold at a discount to their face (or par) value. When they mature, the owner collects the full face value of the security. The difference is the interest you receive.

Typically, longer-term Treasurys offer a higher interest rate than shorter-term Treasurys, as is typical with bonds. This higher rate is due to a number of factors but incorporates the uncertain direction of inflation and interest rates. However, in some cases called yield curve inversions, short-term Treasury rates may be higher than long-term rates.

Taxes

Treasury securities – bonds, notes and bills – are subject to federal income taxes, including both ordinary income taxes and capital gains taxes, if applicable.

However, these Treasury securities are exempt from state and local taxes.

How to buy Treasury securities

Investors can buy Treasurys directly from the U.S. Treasury as well as from brokers and banks.

You can purchase Treasurys from the U.S. government at TreasuryDirect.gov, and you can do so commission-free, potentially eliminating fees when purchasing through a middleman. You’ll need to set up an account with the site, which also allows you to purchase savings bonds such as Series EE bonds and inflation-protected Series I bonds.

Some of the best online brokers also charge no commission to buy and sell Treasurys. For example, Charles Schwab and E-Trade allow you to purchase them at no cost.

Other ways to invest in Treasurys

It’s also easy to invest in Treasurys through exchange-traded funds (ETFs), and you can buy a fund with targeted exposure to short-, medium- and long-term Treasurys.

For short-term Treasurys, you could consider the iShares Short Treasury Bond ETF (SHV) or the Vanguard Short-Term Treasury ETF (VGSH). The iShares fund holds Treasurys maturing in a year or less, while the Vanguard fund has a weighted average maturity of one to three years.

Those looking for long-term exposure to Treasurys could consider the iShares 20+ Year Treasury Bond ETF (TLT), which owns bonds with maturities of 20 years or more.

Unlike owning the bonds directly, however, an ETF will charge a small expense ratio. But you won’t typically pay commissions on the purchase or sale of ETFs, since the major online brokerages allow you to trade ETFs for no commission.

Should you invest in Treasurys?

Whether you should invest in Treasurys depends on your own personal financial needs. Treasurys offer a variety of positive features:

Low credit risk: The U.S. government is among the best creditors in the world, meaning you’re highly likely to receive your interest payments over time and principal at maturity.
High liquidity: The market for Treasurys is the single largest bond market in the world, making it easy to buy and sell your securities.
Competitive interest rates: Treasury rates are often competitive with rates on high-yield savings accounts, meaning they may be a good spot for short-term cash.
Tax-exempt income: Interest is free of state and city taxes, making payouts more attractive.

You’ll want to balance these advantages against potential downsides, such as Treasurys’ lower overall returns compared to corporate bonds or the S&P 500. Fixed-rate bonds may decline in value as interest rates rise, meaning you could lose money if you must sell them.

Bottom line

The key difference between Treasury bills, Treasury notes and Treasury bonds is their maturity at issuance. Investors should also be aware that these securities are exempt from state and local taxes, meaning Treasurys may be more attractive to investors in high-tax cities and states.