Treasury Notes: Definition, Rates and Guide
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Treasury notes are a type of U.S. security known for their high credit quality, as well as state tax advantages.
The 10-year Treasury note rate is 3.5%.
Keep in mind, though, Treasury notes are still vulnerable to risks driven by the economic environment.
What are Treasury notes?
Treasury notes are the middle children of the Treasury security family. Also known as T-notes, Treasury notes are intermediate-term U.S. debt securities available in two-, three-, five-, seven- and 10-year maturities. An investment in a T-note is essentially a loan to the U.S. government that pays you back with interest over time.
Treasury notes are one of the four main types of Treasury securities. They differ from Treasury bonds and bills in their times to maturity and structure. And unlike Treasury inflation-protected securities, which adjust their interest rates and principal based on the Consumer Price Index, Treasury notes offer a fixed rate of interest that is paid every six months.
They’re also state- and local-tax-free, meaning you only pay federal income taxes on any interest earned.
Here are some other Treasury note basics:
The face value of the T-note is the price if held to maturity.
This differs from the market price investors will pay for a Treasury note, which is affected by factors like inflation and interest rates in the current economic environment.
The yield to maturity is the total return if you hold the Treasury note to maturity.
The interest rate for T-notes is the amount you receive semiannually for loaning the government money.
If you buy Treasury notes directly from the government, any interest earned is added to your TreasuryDirect account as it accrues. If, on the other hand, you’re investing through a fund, those profits are typically reinvested automatically.
The current rate for 10-year Treasury notes is 3.5% . TreasuryDirect announces and auctions T-note rates monthly .
Interest rate risk
All investments face risks of some kind. And as low-risk as T-notes are, they can still be affected by inflation, interest rates and a changing economy.
Longer-term Treasury investments, such as Treasury bonds and notes, yield higher rates than shorter-term bonds, such as Treasury bills. That’s because the threat of an economic downturn and rising rates, which can affect the value of bonds, make longer-term Treasury notes riskier than shorter-term bonds.
Interest rates and bond prices have an opposite relationship, meaning prices decrease when interest rates increase and vice versa. Therefore, the longer it takes for a T-note to mature, the more time inflation or other economic events can cause the Federal Reserve to change interest rates and for T-note prices to decline. This is known as interest rate risk.
Are Treasury notes a good investment?
Whether Treasury notes — or any investment — are the right fit for you depends on your investment goals, risk tolerance and timeline.
Treasury securities of all types are generally considered lower-risk and lower-reward investments compared with stocks. This is because Treasury securities are backed, or insured, by the U.S. federal government.
One benefit of the relative stability of T-notes in a financial portfolio is the cushion they can provide to offset the volatility of stocks. Treasury notes also offer the benefit of higher yields than Treasury bills while being exposed to less interest rate risk than a Treasury bond of longer duration. This is because Treasury bills mature in less than one year and don’t pay interest, whereas Treasury bonds mature in 20 or 30 years and pay interest semiannually.
» Learn more: Guide to Treasurys
How to buy T-Notes:
You can purchase Treasury notes through a bank, online brokerage or directly from the U.S. government at TreasuryDirect.gov. T-Notes can be purchased for a minimum investment of $100 or in increments of $100 up to $10 million.
For easy diversification, you can also purchase a collection of Treasury notes through mutual funds and exchange-traded funds or ETFs.
» Learn more: What is a brokerage account and how do I open one?