Treasury bonds are long-term, fixed income debt securities issued by the U.S. Department of the Treasury. Also known as U.S. Treasury bonds or T-bonds, they are backed by the federal government and pay a fixed rate of interest every six months until maturity. In this article, we’ll explain how Treasury bonds work, how they compare with Treasury bills and notes, and the benefits and risks investors should understand.

How U.S. Treasury bonds work

With a U.S. Treasury bond, the government borrows a dollar amount from you (usually a minimum of $100 and going up in increments of $100 from there) and promises to regularly pay you interest. At the end of the loan term, it gives back the original amount you lent it. And even though the U.S. government credit rating was reduced back in 2011, it's still rated AA+ by Standard and Poor's – which indicates a strong capacity for the issuer to meet financial commitments.

How U.S. Treasury bonds compare to bills and notes

You may be familiar with the three main types of U.S. government Treasuries: bills, notes and bonds. The difference between them is simply the length of the loan you're giving to the government. U.S. Treasury notes are issued in maturities ranging from two years to 10 years, while U.S. Treasury bonds' are issued with 20- or 30-year terms. Both pay interest twice a year.

Treasury bills (more known commonly as "T-bills") are very short-term, maturing between four and 52 weeks. Unlike notes or bonds that pay regular interest payments, when you buy a T-bill, you generally buy it at a discount. Then, when the bill matures, you receive its face value. For example, let's say you pay $9,700 for a 13-week T-bill. The government is basically writing you an IOU for $10,000 and agreeing to pay it back to you in three months.

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U.S. Treasury bond benefits

U.S. Treasuries, including bonds, T-bills, and notes, are popular investment options for multiple reasons.

Fixed interest payments

U.S. Treasury bonds and notes pay a fixed rate of interest semiannually. The reliability of consistent interest payments makes these securities an attractive investment option for those who want regular income from their investments, such as those in or near retirement.

Low-risk investing

Treasury securities are backed by the full faith and credit of the U.S. government, making the risk of default minimal. For this reason, Treasuries are considered relatively safe investments.

Tax benefits

The interest on U.S. bills, notes and bonds is federally taxable, but is exempt from state and local taxes.

We know you can buy Treasuries at any bank, but at Edward Jones you won't just be sent on your merry way with a deposit receipt and a bond certificate. We'll work with you to see how and when U.S. Treasury bonds, notes and bills make sense as you progress toward your financial goals.

Treasuries are highly liquid compared to other types of bonds, making them relatively easy investments to enter or exit. The deeper, more liquid market could potentially lead to lower transaction costs and greater price transparency for Treasury investors. 

Potential U.S. Treasury bond risks

As with any other type of investment, Treasury bonds do carry risk.

Interest rate risk

As with all fixed-income investments, U.S. Treasury securities carry interest rate risk. Bond prices generally fall when interest rates rise and vice versa. The longer a bond’s maturity, the more sensitive its price to changes in interest rates. Therefore, Treasury bonds and notes carry more interest rate risk than T-bills. However, the greater interest rate risk associated with Treasury bonds and notes is usually accompanied by higher yields.

Opportunity cost

As a lower-risk investment, U.S. Treasuries have historically offered lower returns than higher-risk investments like high-yield bonds and stocks. In this case, opportunity cost refers to the risk that other investments will outperform Treasuries. We recommend investors diversify across a variety of asset classes, investment styles and sectors based on their financial goals. We believe a portfolio spread across different asset classes can help reduce drastic swings in the value of your portfolio, putting you in a better position to achieve your long-term goals.

Inflation risk

Treasury bonds, bills and notes pay a fixed rate of interest and have a fixed par value, regardless the level of inflation. As a result, there is risk that the fixed interest payments might not keep up with the rate of inflation. In addition to bonds, bills and notes, the U.S. Treasury Department also issues Treasury Inflation Protected Securities (TIPS), which can help protect investors from inflation. As inflation rises, the par value of TIPS rises with it. While the interest rate is fixed at the time of issuance, the interest payments will increase if the par value is adjusted higher, since the payments would be based on a higher par value. When TIPS mature, the investor will receive the greater of the inflation-adjusted principal or the original principal.

How to buy Treasury bonds

Investors can buy Treasury bonds in several ways, including through a financial institution, brokerage firm, or financial advisor. Before buying a Treasury bond, it’s important to consider the bond’s maturity, yield, price, interest rate risk, and how it fits within your overall investment strategy. A financial advisor can help you determine whether U.S. Treasury bonds, Treasury bills, or other fixed-income investments are appropriate for your goals.

Are Treasury bonds a good investment?

Whether U.S. Treasury bonds are right for you will depend on your unique situation. We recommend investors work with their financial advisor to build a well-diversified portfolio aligned to their financial goals. Our strategic asset allocation guidance can provide a solid foundation from which to build a well-diversified portfolio.

Treasury bonds FAQs

What is the downside to buying Treasury bonds?

Treasury bonds are considered low-risk investments, but they are not risk-free. Their main risks include interest rate risk, inflation risk and opportunity cost. For example, if interest rates rise, the market value of an existing Treasury bond may fall, especially for longer-term bonds. That’s why Edward Jones generally recommends building a well-diversified portfolio based on your financial goals rather than relying on one type of investment.

How much does a $10,000 Treasury bill cost?

A $10,000 Treasury bill, or T-bill, usually costs slightly less than $10,000 because Treasury bills are typically sold at a discount, though they can also be sold at face value. The exact cost depends on the auction rate or market price at the time of purchase. When the T-bill matures, you receive the full $10,000 face value, and the difference between your purchase price and the face value is your interest.

Which is better, a CD or a Treasury bond?

Neither is automatically better. A CD may be appropriate for investors who want a fixed rate over a shorter period and value FDIC insurance, when held at an FDIC-insured bank within applicable limits. A Treasury bond may be appropriate for investors seeking longer-term fixed income, semiannual interest payments and interest that is generally exempt from state and local income taxes. The right choice depends on your goals, time horizon, liquidity needs and overall portfolio strategy.

Current Treasury bond rates

Get up-to-date information on current bond, CD and money market rates. Rates.

How Edward Jones can help with U.S. Treasury bonds

To learn more about whether U.S. Treasuries could play a role in your portfolio, please contact your local Edward Jones financial advisor.