What Are Treasury Bonds?

Treasury bonds (T-bonds) are long-term debt securities issued by the US Department of the Treasury with terms of 20 or 30 years. They pay a fixed rate of interest every six months and return their face value at maturity, and they are backed by the full faith and credit of the US government.

In casual use, “Treasury bonds” often means any Treasury security. Strictly, the Treasury uses three names by maturity: bills mature in 52 weeks or less, notes in 2 to 10 years, and bonds in 20 or 30 years. The distinction matters because the longer the term, the more a bond’s price moves when interest rates change.

Treasury Bills vs. Notes vs. Bonds

All five are marketable securities, meaning they can be bought and sold on the secondary market after they’re issued. Savings bonds (Series EE and I) are a separate product that can’t be traded.

How Do Treasury Bonds Work?

The Treasury sells new bonds at scheduled auctions throughout the year. The interest rate is set at the auction and stays fixed for the life of the bond. You can buy in $100 increments, and depending on how the auction clears, you may pay slightly more or less than face value.

After that, you receive interest twice a year until maturity. A $10,000 bond with a 4.5% rate pays $225 every six months, or $450 a year, for 30 years, then repays the $10,000.

If you sell before maturity, you get the market price, and for a 30-year bond that price is highly sensitive to rates. Consider a bond with a 4.5% coupon bought at face value:

A 2-year note with a similar coupon would move by roughly 2% in either direction. That sensitivity is the main risk of Treasury bonds. Default risk is minimal; price risk is not.

Are Treasury Bonds Taxable?

Interest from Treasury bonds is subject to federal income tax but exempt from state and local income tax. That exemption is worth more the higher your state tax rate, and it can make a Treasury more attractive than a corporate bond or CD with a slightly higher yield.

If you sell a bond before maturity for more or less than you paid, the difference is generally a capital gain or loss. Inside an IRA or 401(k), none of this applies year to year, because the account itself shelters the income, which also means the state tax exemption provides no extra benefit there.

How to Buy Treasury Bonds

TreasuryDirect. You can buy new bonds directly from the government at auction through a TreasuryDirect account, with no fees, up to $10 million per auction as a non-competitive bid. You can’t sell from TreasuryDirect, though. To sell before maturity, you have to transfer the bond to a brokerage account, and it must be held at least 45 days first.

A brokerage account. Through a broker you can bid at auction or buy existing bonds on the secondary market, and you can sell whenever the market is open. This is the more flexible route if you might need the money early.

Funds and ETFs. Long-term Treasury funds hold a basket of bonds and replace them as they age, so they never mature. That makes them convenient but different in kind: a fund doesn’t return a known amount on a known date. If you want Treasury exposure that ends on a schedule, a bond ladder of individual Treasuries does that.

Are Treasury Bonds a Good Investment?

Treasury bonds offer the most secure nominal payments available to US investors and have at times risen while stocks fell sharply, as in 2008. That makes them useful as a portfolio stabilizer and as a way to lock in a known income stream for decades.

The costs are inflation risk and rate risk. A fixed payment set for 30 years loses purchasing power if inflation runs higher than expected, and long bonds can fall alongside stocks when rates rise, as they did in 2022. TIPS address the inflation half by adjusting principal with the Consumer Price Index.

Where you hold Treasuries also matters. Their state tax exemption only helps in a taxable account, while the federal tax on their interest argues for a tax-deferred one. To keep bonds in a particular account first, rank it at the top of bond location priorities in ProjectionLab.

Frequently Asked Questions

Are Treasury bonds safe? From default, yes. They’re backed by the full faith and credit of the US government and are generally treated as free of credit risk. Their market price is not safe from rate changes, though, and a 30-year bond can lose around 15% of its value if rates rise one percentage point.

What’s the difference between Treasury bonds and savings bonds? Treasury bonds are marketable securities with 20- or 30-year terms that you can buy through a broker and sell before maturity. Savings bonds (Series EE and I) are sold only through TreasuryDirect, can’t be sold to other investors, and are redeemed back to the Treasury instead.

Can you sell a Treasury bond before it matures? Yes, through a brokerage account, at whatever the market price is on the day you sell. Bonds held at TreasuryDirect have to be transferred to a broker first, after a 45-day holding period.

What are short-term Treasury bonds? Technically there aren’t any, since Treasury bonds are 20- or 30-year securities. The short-term options are Treasury bills (52 weeks or less) and shorter notes (2 to 5 years), which carry much less price sensitivity to interest rates.

What happens when a Treasury bond matures? You receive its face value along with the final interest payment. At TreasuryDirect you can choose to have the proceeds reinvested in a new security automatically.