Treasury securities are debt instruments issued by the U.S. government to finance its operations. When you buy a Treasury, you're lending money to the federal government, which promises to repay with interest. They're often considered among the lowest-risk investments available because they're backed by the "full faith and credit" of the U.S. government.
In this comprehensive guide, we'll explore the different types of Treasury securities, how they work, how to buy them, the yield curve, inflation-protected options, risks, and how Treasuries fit into an investment portfolio.
📑 Table of Contents
- Types of Treasury Securities
- How Treasury Securities Work
- How to Buy Treasuries
- Understanding the Yield Curve
- Inflation-Protected Securities: TIPS vs. I Bonds
- Tax Treatment
- Interest Rate Risk and Duration
- Treasury ETFs and Funds
- Risks of Treasury Investing
- FAQ: Frequently Asked Questions
1. Types of Treasury Securities
The U.S. Treasury issues several types of securities with different maturities and characteristics:
| Security Type | Maturity | Interest Payment | Minimum Purchase | Key Feature |
|---|---|---|---|---|
| Treasury Bills (T-Bills) | 4, 8, 13, 17, 26, 52 weeks | Sold at discount | $100 | Short-term, no coupon payments |
| Treasury Notes (T-Notes) | 2, 3, 5, 7, 10 years | Semi-annual coupon | $100 | Most commonly traded |
| Treasury Bonds (T-Bonds) | 20, 30 years | Semi-annual coupon | $100 | Long-term, highest duration |
| TIPS | 5, 10, 30 years | Semi-annual (inflation-adjusted) | $100 | Principal adjusts with CPI |
| I Bonds | 30 years (1-year min hold) | Accrues (paid at redemption) | $25 electronic | Rate adjusts with inflation |
| FRNs (Floating Rate Notes) | 2 years | Quarterly (variable) | $100 | Rate adjusts with T-Bill rates |
2. How Treasury Securities Work
T-Bills: Zero-Coupon Securities
T-Bills don't pay periodic interest. Instead, they're sold at a discount to face value and you receive the full face value at maturity. The difference is your interest.
| T-Bill Example | Value |
|---|---|
| Face Value | $10,000 |
| Purchase Price (26-week bill at 5% annual) | $9,756 |
| Maturity (26 weeks later) | $10,000 |
| Interest Earned | $244 |
| Annualized Yield | ~5.0% |
T-Notes and T-Bonds: Coupon Securities
Notes and Bonds pay interest (coupon) every 6 months. At maturity, you receive your final coupon payment plus the face value.
| 10-Year T-Note Example | Value |
|---|---|
| Face Value | $10,000 |
| Coupon Rate | 4.5% |
| Annual Interest | $450 |
| Semi-Annual Payment | $225 every 6 months |
| Total Payments Over 10 Years | 20 payments × $225 = $4,500 |
| At Maturity | Final $225 + $10,000 face value |
💡 Price vs. Yield
When you buy a Treasury at auction, you receive the stated coupon rate. But on the secondary market, prices fluctuate. If you pay more than face value (premium), your effective yield is lower than the coupon. If you pay less (discount), your yield is higher. The "yield to maturity" (YTM) accounts for this difference.
3. How to Buy Treasuries
| Method | Best For | Fees | Pros | Cons |
|---|---|---|---|---|
| TreasuryDirect.gov | Buy-and-hold investors | None | No fees, direct from government, required for I Bonds | Clunky interface, can't sell easily |
| Brokerage (Secondary) | Active traders, flexibility | Low/None | Easy to buy/sell, integrates with portfolio | Slight bid-ask spread |
| Brokerage (Auction) | New issues at auction | None | Auction prices, convenient | Not all brokers offer all auctions |
| Treasury ETFs | Diversification, liquidity | Expense ratio (0.03-0.15%) | Instant diversification, very liquid | No maturity date, ongoing fees |
| Treasury Mutual Funds | 401(k), automatic investing | Expense ratio varies | Auto-invest, available in retirement plans | Higher fees than ETFs typically |
TreasuryDirect Purchase Limits
| Security | Annual Purchase Limit | Notes |
|---|---|---|
| T-Bills | $10 million per auction | Non-competitive bids |
| T-Notes | $10 million per auction | Non-competitive bids |
| T-Bonds | $10 million per auction | Non-competitive bids |
| TIPS | $10 million per auction | Non-competitive bids |
| I Bonds | $10,000/person (electronic) | +$5,000 paper via tax refund |
4. Understanding the Yield Curve
The yield curve plots Treasury yields across different maturities. It's one of the most watched indicators in finance.
| Yield Curve Shape | What It Looks Like | What It May Indicate |
|---|---|---|
| Normal (Upward Sloping) | Short rates < Long rates | Economic growth expected |
| Flat | Short rates ≈ Long rates | Uncertainty, transition period |
| Inverted | Short rates > Long rates | Recession warning (historically) |
| Steep | Large gap between short and long | Strong growth expected, Fed may be accommodative |
Sample Yield Curve Data
| Maturity | Normal Curve | Inverted Curve |
|---|---|---|
| 1 Month | 4.50% | 5.40% |
| 3 Month | 4.60% | 5.35% |
| 6 Month | 4.70% | 5.25% |
| 1 Year | 4.85% | 5.10% |
| 2 Year | 5.00% | 4.80% |
| 5 Year | 5.20% | 4.50% |
| 10 Year | 5.40% | 4.30% |
| 30 Year | 5.60% | 4.40% |
⚠️ Yield Curve Caution
While an inverted yield curve has preceded past recessions, it's not a perfect predictor. The timing between inversion and recession varies (6 months to 2 years historically). And sometimes inversions occur without recession. It's an indicator, not a guarantee.
5. Inflation-Protected Securities: TIPS vs. I Bonds
Both TIPS and I Bonds protect against inflation, but they work differently:
📊 TIPS
- Traded on secondary market
- Principal adjusts with CPI
- Pay semi-annual coupon on adjusted principal
- No purchase limit
- Subject to "phantom income" tax issue
- Can be bought via ETFs (TIP, SCHP)
- Price fluctuates daily
💰 I Bonds
- Only through TreasuryDirect
- Interest rate adjusts with CPI
- Interest accrues (paid at redemption)
- $10,000/year limit per person
- Tax deferred until redemption
- Cannot be sold (only redeemed)
- No price volatility
TIPS vs. I Bonds Detailed Comparison
| Feature | TIPS | I Bonds |
|---|---|---|
| How to Buy | TreasuryDirect, brokers, ETFs | TreasuryDirect only |
| Maturities | 5, 10, 30 years | 30 years (redeemable after 1 year) |
| Annual Limit | None | $10,000 electronic + $5,000 paper |
| Inflation Adjustment | Principal adjusts | Interest rate adjusts |
| Interest Payment | Semi-annual cash | Accrues (paid at redemption) |
| Minimum Hold | None (can sell anytime) | 1 year minimum |
| Early Redemption Penalty | Market price (could be loss) | 3 months interest if < 5 years |
| Tax Timing | Annual (phantom income issue) | Deferred until redemption |
| Liquidity | High (market-traded) | Low (redemption only) |
💡 I Bonds Sweet Spot
I Bonds are particularly attractive for their simplicity: no price volatility, tax-deferred growth, and guaranteed inflation protection. The main limitation is the $10,000 annual purchase limit. They're excellent for emergency funds or shorter-term savings where you want inflation protection without market risk.
6. Tax Treatment
Treasury interest has a unique tax advantage: it's exempt from state and local income taxes.
| Tax Type | Treasury Interest | Corporate Bond Interest | Municipal Bond Interest |
|---|---|---|---|
| Federal Income Tax | Taxable | Taxable | Usually exempt |
| State Income Tax | Exempt | Taxable | Varies (often exempt if in-state) |
| Local Income Tax | Exempt | Taxable | Varies |
State Tax Benefit Example
| Scenario | Treasury | Corporate Bond | Difference |
|---|---|---|---|
| Interest Earned | $5,000 | $5,000 | — |
| Federal Tax (24% bracket) | $1,200 | $1,200 | $0 |
| State Tax (CA: 9.3%) | $0 | $465 | $465 saved |
| Total Tax | $1,200 | $1,665 | $465 saved |
*Tax benefit is most valuable in high-tax states like CA, NY, NJ.
7. Interest Rate Risk and Duration
Even "safe" Treasuries can lose money if you sell before maturity and rates have risen. Duration measures this sensitivity:
| Treasury Type | Approximate Duration | If Rates Rise 1% | If Rates Fall 1% |
|---|---|---|---|
| 3-Month T-Bill | ~0.25 years | ~-0.25% | ~+0.25% |
| 2-Year T-Note | ~1.9 years | ~-1.9% | ~+1.9% |
| 5-Year T-Note | ~4.5 years | ~-4.5% | ~+4.5% |
| 10-Year T-Note | ~8 years | ~-8% | ~+8% |
| 30-Year T-Bond | ~18 years | ~-18% | ~+18% |
📐 Duration Rule of Thumb
If interest rates rise by 1%, a bond loses approximately its duration percentage in price. A 10-year Treasury with 8-year duration drops ~8% in price if rates rise 1%. This is why long-term Treasuries lost 30%+ in 2022 when the Fed raised rates rapidly.
8. Treasury ETFs and Funds
For most investors, Treasury ETFs offer the easiest way to invest in Treasuries with instant diversification:
| ETF | Focus | Duration | Expense Ratio | Best For |
|---|---|---|---|---|
| BIL | 1-3 Month T-Bills | ~0.1 years | 0.1356% | Cash alternative |
| SHV | Short-term Treasury | ~0.3 years | 0.15% | Very short-term |
| SHY | 1-3 Year Treasury | ~1.9 years | 0.15% | Short-term allocation |
| IEI | 3-7 Year Treasury | ~4.4 years | 0.15% | Intermediate |
| IEF | 7-10 Year Treasury | ~7.5 years | 0.15% | Core bond allocation |
| TLT | 20+ Year Treasury | ~17 years | 0.15% | Long duration, rate bets |
| TIP | TIPS (all maturities) | ~6.8 years | 0.19% | Inflation protection |
| GOVT | All Treasury maturities | ~6 years | 0.05% | Broad Treasury exposure |
9. Risks of Treasury Investing
| Risk Type | Description | Impact | Mitigation |
|---|---|---|---|
| Interest Rate Risk | Prices fall when rates rise | Can be significant for long-term bonds | Shorter duration, hold to maturity |
| Inflation Risk | Fixed payments lose purchasing power | Real returns can be negative | TIPS, I Bonds, shorter maturities |
| Reinvestment Risk | Must reinvest at lower rates when bond matures | Lower future income | Bond ladders, longer maturities |
| Opportunity Cost | Lower returns than riskier assets | Less wealth accumulation over time | Balanced portfolio, appropriate allocation |
| Credit Risk | Government default | Minimal for U.S. Treasuries | Considered "risk-free" for credit |
⚠️ 2022: A Lesson in "Safe" Asset Risk
In 2022, long-term Treasury bonds (TLT) lost over 30% as the Fed raised rates aggressively. Even the "safest" bonds can have significant losses if you need to sell before maturity. "Safe from default" doesn't mean "safe from loss."
10. FAQ: Frequently Asked Questions
Are Treasuries really "risk-free"?
Treasuries are considered "risk-free" only in terms of credit risk—the U.S. government is extremely unlikely to default. But they carry real risks: interest rate risk (prices fall when rates rise), inflation risk (purchasing power can decline), and opportunity cost (lower returns than riskier investments). The term "risk-free rate" in finance refers specifically to the absence of default risk.
Should I use TreasuryDirect or a brokerage?
TreasuryDirect is best for I Bonds (only available there) and if you're certain you'll hold to maturity. Brokerages are better for flexibility—you can sell before maturity if needed, and it's easier to manage alongside other investments. Many investors use both: TreasuryDirect for I Bonds and a brokerage for other Treasuries.
What's the difference between T-Bills, T-Notes, and T-Bonds?
The main difference is maturity. T-Bills: 4-52 weeks, sold at discount, no coupon payments. T-Notes: 2-10 years, semi-annual coupon payments. T-Bonds: 20-30 years, semi-annual coupon payments. Longer maturities typically offer higher yields but carry more interest rate risk. The 10-year T-Note is the most commonly referenced Treasury.
Should I buy TIPS or I Bonds for inflation protection?
I Bonds are simpler: no price volatility, tax-deferred, and easier to understand. TIPS offer more flexibility and no purchase limits but have "phantom income" tax issues and price volatility. For most individual investors saving up to $10,000/year, I Bonds are often the better choice. TIPS (or TIPS ETFs) are better for larger allocations or institutional investors.
Why would anyone buy 30-year Treasuries?
Long-term Treasuries serve several purposes: (1) locking in current rates for predictable income, (2) portfolio insurance—they often rise when stocks crash, (3) pension funds matching long-term liabilities, (4) speculation on falling rates. They're volatile but can provide strong returns when rates fall. In 2008, long Treasuries returned +20% while stocks fell -37%.
How much of my portfolio should be in Treasuries?
There's no one-size-fits-all answer. Common frameworks: 100-minus-your-age in stocks (rest in bonds), or target-date funds that adjust automatically. Younger investors with long time horizons might hold less; retirees needing income and stability typically hold more. Treasuries provide stability and income but sacrifice growth potential. Consider your goals, timeline, and risk tolerance.
What happens if the U.S. government defaults?
A true default has never happened and is considered extremely unlikely—the U.S. can print dollars to pay dollar-denominated debt. However, debt ceiling standoffs create periodic uncertainty. If a technical default occurred, it would likely be brief and resolved quickly due to the catastrophic consequences. Most experts consider U.S. Treasury default risk negligible, though not literally zero.
Conclusion
Treasury securities are government-issued debt instruments that form the foundation of the global financial system. They're considered among the safest investments due to minimal credit risk, but they still carry interest rate and inflation risks.
Key takeaways:
- T-Bills (short), T-Notes (medium), T-Bonds (long) differ mainly by maturity
- TIPS and I Bonds protect against inflation in different ways
- Treasury interest is exempt from state and local taxes
- The yield curve signals economic expectations
- Duration measures interest rate sensitivity
- Long-term Treasuries can have significant price volatility
- ETFs like IEF, TLT, and TIP offer easy Treasury exposure
- "Risk-free" refers only to credit risk—not price or inflation risk
Whether used for capital preservation, portfolio diversification, or income generation, understanding Treasury securities helps you make informed decisions about the fixed income portion of your portfolio.
📚 Related Articles
📖 Official Resources
⚠️ Final Reminder
This article is for educational purposes only and does not constitute investment advice. Even Treasuries carry risks—interest rate changes can cause significant losses if sold before maturity. Past performance does not guarantee future results. Consult a qualified financial advisor before making investment decisions.