When it comes to Treasury securities, the terms Treasury note, Treasury bond, and Treasury bill may seem interchangeable, but each has a distinct difference based on maturity length. These securities represent a promise from the U.S. federal government to repay a loan to the holder, with the key variation being when the principal is repaid.
Let’s delve into what sets Treasury bonds, notes, and bills apart, as well as their similarities.
Understanding Treasury Bills
Treasury bills, also known as T-bills, are a type of Treasury security used by the U.S. Department of the Treasury to finance government operations. They typically have maturities ranging from four weeks to one year and are issued electronically.
Exploring Treasury Notes
Treasury notes, or T-notes, are another form of Treasury security utilized for government funding. These notes come with maturities of two to 10 years.
Deciphering Treasury Bonds
Treasury bonds, also referred to as T-bonds, are a major type of Treasury security issued for government financing purposes. They have longer maturities, typically 20 or 30 years.
Comparing Treasury Bonds, Notes, and Bills
Let’s compare these Treasury securities across key dimensions.
Maturity
The most notable difference lies in the maturity period of each type of Treasury security.
- T-bills have maturities of one year or less.
- T-notes have maturities ranging from two to 10 years.
- T-bonds have maturities of 20 or 30 years.
Interest
Interest accrual and payment mechanisms slightly differ among these securities.
T-notes and T-bonds pay interest semi-annually, in line with typical bond practices.
On the other hand, T-bills are sold at a discount to their face value and do not pay interest during the holding period. The owner receives the full face value at maturity, reflecting the interest earned.
Generally, longer-term Treasury securities offer higher interest rates compared to shorter-term ones, influenced by factors like inflation and interest rate fluctuations. However, there are instances, known as yield curve inversions, where short-term rates exceed long-term rates.
Taxes
Treasury securities are subject to federal income taxes, including ordinary income taxes and capital gains taxes if applicable.
However, these securities are exempt from state and local taxes.
Acquiring Treasury Securities
Investors can purchase Treasurys directly from the U.S. Treasury, as well as through brokers and banks.
One can acquire Treasurys from the U.S. government at TreasuryDirect.gov, commission-free, eliminating intermediary fees. Setting up an account on the site also enables the purchase of savings bonds like Series EE and Series I bonds.
Leading online brokers such as Charles Schwab and E-Trade offer commission-free transactions for buying and selling Treasurys.
Alternative Paths to Treasury Investment
Investing in Treasury securities through exchange-traded funds (ETFs) provides a convenient option, allowing targeted exposure to short-, medium-, and long-term Treasurys.
For short-term Treasury exposure, options like the iShares Short Treasury Bond ETF (SHV) or the Vanguard Short-Term Treasury ETF (VGSH) can be considered. The iShares fund holds Treasurys maturing within a year, while the Vanguard fund’s maturity ranges from one to three years.
Long-term Treasury exposure can be achieved through the iShares 20+ Year Treasury Bond ETF (TLT), holding bonds with maturities exceeding 20 years.
While ETFs entail a small expense ratio compared to direct bond ownership, they offer commission-free trading on major online platforms.
Assessing Treasury Investment Suitability
Deciding on Treasury investment hinges on individual financial objectives. Treasurys boast several advantages:
- Low credit risk: The U.S. government’s creditworthiness ensures timely interest payments and principal repayment.
- High liquidity: Treasurys enjoy high market liquidity, facilitating ease of buying and selling.
- Competitive interest rates: Treasury rates often rival those of high-yield savings accounts, making them attractive for short-term cash placement.
- Tax-exempt income: Exemption from state and local taxes enhances the attractiveness of Treasury payouts.
However, one must weigh these benefits against potential drawbacks, such as lower returns compared to corporate bonds or equities. Fixed-rate bonds may experience value decline with rising interest rates, leading to potential losses upon sale.
In Conclusion
The distinguishing factor among Treasury bills, notes, and bonds is their maturity at issuance. It’s important to note that these securities are exempt from state and local taxes, making them particularly appealing to investors in high-tax regions.