Treasury Notes

Treasury notes, often called T-notes, are debt securities issued by the US Department of the Treasury that mature in 2, 3, 5, 7 or 10 years and pay a fixed rate of interest every six months. They are sold at auction to fund government borrowing and are held by individuals, banks, money managers, foreign central banks and the Federal Reserve. The 10-year note is the most widely watched benchmark for long-term US interest rates.

Notes sit between two other kinds of marketable Treasury debt. Treasury bills mature in a year or less and pay no coupon, while Treasury bonds mature in 20 or 30 years; the differences between the two ends are set out in Treasury bills vs Treasury bonds. Notes are a US instrument; other governments issue similar medium-term debt under their own names, such as gilts in the United Kingdom and Bundesobligationen in Germany.

Buying a Treasury note is like lending the US government money for a set number of years, the way you might lend a relative money and agree to get it back at a fixed date. In exchange, the government sends you a fixed interest payment twice a year, like clockwork, and returns the full amount on the final date.

Because the borrower is the federal government, the chance of not being paid is treated as very low, which is why notes are seen as one of the safest places to keep savings for a few years. The catch is that the interest rate is fixed on the day you buy. If rates in the wider market rise later, your note looks less attractive, and anyone who sells before the end may get back less than they paid.

• Terms. Notes are issued with maturities of 2, 3, 5, 7 or 10 years.
• Interest. The coupon rate is set at auction and never goes below 0.125%. It is paid every six months until the note reaches maturity, when the face value is repaid.
• Minimum purchase. Notes are sold in multiples of $100 and exist only in electronic form, held through TreasuryDirect or a bank or broker.
• Taxes. Interest is subject to federal income tax but exempt from state and local income taxes.
• Price. A note can sell at, above or below face value. If the auction yield is higher than the coupon, buyers pay less than face value, and the difference adds to their return.

The Treasury also issues inflation-protected TIPS, first sold in 1997, and two-year floating rate notes, first auctioned in January 2014. Both are notes in a broad sense but follow their own rules, linked to inflation and to short-term bill rates respectively.

Each semiannual interest payment is half of the annual coupon:

• $F$ is the face value of the note.
• $c$ is the annual coupon rate, as a decimal.
• Dividing by 2 reflects two payments a year.

An investor who holds $10,000 face value of a 10-year note with a 4.25% coupon receives $10{,}000 \times 0.0425 \div 2 = 212.50$, so $212.50 every six months, or $425 a year. Over ten years that is 20 payments totalling $4,250, plus the $10,000 face value at maturity. The investor's actual yield also depends on the price paid at purchase.

The 2-, 3-, 5- and 7-year notes are auctioned every month. New 10-year notes are issued in February, May, August and November and reopened in the other eight months, adding to existing issues. Bidders may place competitive bids, which state a yield, or non-competitive bids of up to $10 million, which accept the yield set at auction. After issue, notes trade actively between dealers, banks and investors, and they are widely used as collateral in repurchase agreements, whose rates feed into SOFR. Notes are eligible for the STRIPS programme, which separates coupons and principal into zero-coupon securities. Unlike a nonmarketable security such as a savings bond, a note can be sold at any time before maturity at the going market price.

The 10-year note yield is used as the reference point for long-term borrowing costs in the United States and beyond. Mortgage rates, corporate bond yields and the valuation of many other assets are compared with it. The yields on notes also make up the middle of the Treasury yield curve, and the gap between the 2-year and 10-year notes is the best-known measure of its slope: a normal yield curve shows the 10-year above the 2-year. The Federal Reserve has bought notes in large amounts during quantitative easing, which pushes their yields down.

Credit risk on notes is regarded as minimal, but they are not free of risk. Their prices fall when market rates rise, and longer notes fall more; in 2022 rapid Federal Reserve rate increases caused large losses on notes held at market value. Fixed coupons also lose purchasing power when inflation runs high, which TIPS were designed to address. Investors who hold a note to maturity receive the face value regardless of price moves in between.

• TreasuryDirect: Treasury Notes
• US Department of the Treasury: Daily Treasury Par Yield Curve Rates