Plenty of savers have discovered Treasury bills over the past few years: short-term government IOUs that mature in a year or less and pay whatever the current market offers. The catch with bills is that the good rate is only yours for a matter of weeks or months. When the bill matures, you reinvest at whatever rates have become, and if rates have fallen, your income falls with them.
The federal government sells two other securities built for exactly that problem. Treasury notes and Treasury bonds let you lock a fixed interest rate for anywhere from 2 to 30 years, with the same government backing as a bill and the same $100 starting price. Here is how they work, how to buy them and what to weigh before you commit money for years.
Notes: two to ten years of fixed interest
Treasury notes are sold in terms of 2, 3, 5, 7 or 10 years. According to TreasuryDirect, the government’s official portal, a note pays a fixed rate of interest every six months until it matures, and the rate is set at auction and never changes over the life of the note. The minimum purchase is $100, in $100 increments, so this is not a product reserved for large investors.
Auctions run on a regular calendar: 2, 3, 5 and 7-year notes are auctioned monthly, while new 10-year notes are auctioned in February, May, August and November, with reopenings of existing 10-year notes eight times a year. The auction calendar lists the specific dates, so you can plan a purchase rather than guessing.
Bonds: the 20 and 30-year commitment
Treasury bonds are the long end of the family. TreasuryDirect sells them in 20 or 30-year terms, again paying a fixed rate every six months until maturity, when the principal comes back. The appeal is obvious for someone who wants a predictable income stream measured in decades, for example a retiree who wants a known semiannual payment landing every year into the 2040s or 2050s.
The trade-off is equally plain. Locking a rate for 30 years is wonderful if rates fall afterward and painful if they rise, because your money is earning yesterday’s rate while new buyers get today’s. That risk matters less if you genuinely plan to hold to maturity and spend the interest, and more if you might need the principal back early.
You are not trapped, but the price can move
Unlike a bank CD, a Treasury note or bond has no early-withdrawal penalty, because there is no withdrawal. You can hold to maturity or sell the security on the open market at any time. What you get when you sell is the market price that day, which can be more or less than you paid, as TreasuryDirect explains in its guide to pricing and interest rates. When market rates rise, existing lower-rate securities sell at a discount; when rates fall, they sell at a premium. Hold to maturity and none of that matters, since the government repays the full face value.
How to buy at auction
Individuals generally buy through a free TreasuryDirect account or through a bank or broker. Most people use a noncompetitive bid, which simply accepts the rate determined at auction and guarantees you receive the amount you asked for, up to $10 million per auction. Competitive bidding, where you specify the yield you want, exists mostly for institutions. There is no fee to buy at auction through TreasuryDirect, which is part of what makes the $100 minimum meaningful for small savers building a ladder.
A ladder is the classic approach: instead of putting everything into one term, you split money across several maturities, for example 2, 5 and 10 years. As each rung matures, you reinvest at whatever rates then prevail. You capture some of today’s rates for years while keeping regular chances to adjust.
The tax quirk that favors some savers
Interest on notes and bonds is subject to federal income tax in the year it is paid, but it is exempt from state and local income taxes, a detail spelled out on the TreasuryDirect pages for each security. For a saver in a state with a meaningful income tax, that exemption can make a Treasury yield worth more after tax than a bank CD paying a similar headline rate, since CD interest is generally taxed at both levels. Savers in states with no income tax lose that edge, and for them the comparison comes down to rate, insurance and convenience.
Where notes and bonds fit
None of this makes longer Treasuries automatically better than bills or CDs. Bills remain the right tool for money you may need soon. Bank CDs are insured by the FDIC and can sometimes out-yield Treasuries at particular maturities, so it always pays to compare. What notes and bonds add is the ability to make today’s rate a long-term fact of your finances rather than a temporary condition, in $100 pieces, with the full faith and credit of the United States behind the payments. For a saver who has watched good short-term rates come and go, that is the whole argument in one sentence.
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