Treasury Notes

Treasury Notes: Definition, Maturity Terms, and Buying Guide

A Treasury note (T-note) is a U.S. government debt security that pays a fixed interest rate and matures in two to ten years. T-notes pay interest semiannually, are highly liquid thanks to an active secondary market, and are taxable at the federal level but exempt from state and local taxes.

Key takeaways

• Maturities: 2, 3, 5, 7, and 10 years.
• Interest: fixed coupon paid twice a year.
• Taxes: federally taxable; exempt from state and local income taxes.
• Purchase options: direct via Treasury auctions (competitive or noncompetitive bids) or through brokers on the secondary market.
• Risk: price sensitivity to interest-rate changes increases with maturity (measured by duration).
• Yield curve shape affects relative prices of short- and long-term notes.

How Treasury notes work

T-notes are issued by the U.S. Treasury to finance government operations. Investors receive periodic coupon payments and the principal at maturity. Because the U.S. government backs them, they carry very low credit risk and are commonly used as a safe, income-producing investment or as a benchmark for other interest rates.

Maturities, payments, and liquidity

• Available maturities: 2, 3, 5, 7, and 10 years.
• Coupon payments: semiannual (every six months).
• Liquidity: active secondary market makes buying and selling straightforward, which helps investors adjust holdings before maturity.

Buying Treasury notes

• Auctions:
• Noncompetitive bids: you agree to accept whatever yield is set at auction; guaranteed to receive the amount you bid (up to limits).
• Competitive bids: you specify the yield you want; allocation depends on the bid and other bidders.
• Secondary market: T-notes can be bought and sold through brokers at market prices between auctions.

Interest-rate risk and duration

T-note prices move inversely with interest rates. Longer maturities generally have greater price sensitivity to rate changes. Duration quantifies this sensitivity by combining coupon, yield, present value, and final maturity into a single measure (expressed in years). Higher duration means larger price swings for a given change in interest rates.

Yield curve effects

The yield curve plots yields across maturities. Changes in its shape create different risks:
* Steepening: long-term rates rise faster than short-term rates; long-term note prices fall relative to short-term note prices.
Flattening: spread between short- and long-term rates narrows; short-term prices may fall relative to long-term prices.
Inversion: short-term rates exceed long-term rates, often signaling broader economic changes and affecting relative returns.

Important considerations for investors

• Match maturity to your time horizon and interest-rate outlook.
• Monitor duration to manage sensitivity to rate moves.
• Consider tax treatment (federal taxation; state and local exemption).
• Use auctions for direct purchase or the secondary market for flexibility and immediate execution.

Bottom line

Treasury notes are low-credit-risk, fixed-income securities with maturities between two and ten years. They provide predictable semiannual interest, broad liquidity, and favorable state-tax treatment. Their primary risks are interest-rate sensitivity and changes in the yield curve, which increase with longer maturities.

Sources: U.S. Department of the Treasury; Federal Reserve Board.