Treasury Notes and Bonds Explainer
Treasury notes and Treasury bonds are marketable debt securities issued by the U.S. Treasury. Notes have intermediate maturities, while bonds have longer maturities. Both normally pay a fixed coupon every six months and return face value at maturity, assuming the security is held until then.
The Treasury sells new issues at public auctions. The coupon rate is set so the security can be issued near par, but the final auction price may be above or below face value. Once issued, notes and bonds trade in a large secondary market where prices respond to interest rates, inflation expectations, economic news, and demand for safe, liquid assets.
When market yields rise, existing fixed-rate Treasury prices generally fall because their coupons become less attractive. When yields fall, prices generally rise. Longer maturities and lower coupons tend to produce greater price sensitivity. Holding to maturity avoids realizing interim price changes but does not remove inflation or opportunity-cost risk.
Treasury notes and bonds are backed by the full faith and credit of the U.S. government. Their interest is federally taxable but generally exempt from state and local income taxes. They are different from savings bonds, which are nonmarketable products with separate purchase, redemption, and interest rules.
Both generally pay fixed interest every six months.
The main distinction is their maturity range.
New market rates change the value of existing fixed coupons.
Long maturities usually react more strongly.
Treasury notes and bonds can be sold before maturity.
Savings bonds follow separate nonmarketable rules.
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