What Is a Treasury Note?
Let me explain what a Treasury note is. A Treasury note, or T-note as it's often called, is a marketable U.S. government debt security that comes with a fixed interest rate and a maturity period between two and ten years.
You can get these notes from the government through either a competitive or noncompetitive bid. If you go with a competitive bid, you specify the yield you're after, but there's a chance your bid won't get approved. With a noncompetitive bid, you just accept whatever yield comes out of the auction.
Key Takeaways
- A Treasury note is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years.
- Treasury notes are available either via competitive bids, in which an investor specifies the yield, or non-competitive bids, in which the investor accepts whatever yield is determined.
- A Treasury note is just like a Treasury bond, except that they have differing maturities—T-bond lifespans are 20 to 30 years.
Understanding Treasury Notes
Treasury notes are issued in maturities of two, three, five, seven, and ten years, and they're popular investments with a large secondary market that boosts their liquidity.
You'll receive interest payments on these notes every six months until they mature. The income from these payments isn't taxable at the municipal or state level, but it is taxed federally, much like with Treasury bonds or bills.
Treasury notes, bonds, and bills are all forms of debt investments issued by the U.S. Treasury. The main difference is in their maturity lengths—for instance, Treasury bonds mature in over 10 years up to 30 years, making them the longest-dated sovereign fixed-income securities.
Treasury Notes and Interest Rate Risk
The longer the maturity of a T-note, the more it's exposed to interest rate risks. Besides credit strength, the value of a note or bond depends on its sensitivity to interest rate changes, which often happen at the absolute level controlled by a central bank or in the shape of the yield curve.
These fixed-income instruments have varying sensitivities to rate changes, meaning price drops occur at different magnitudes. This sensitivity is measured by duration, expressed in years, and calculated using factors like coupon, yield, present value, final maturity, and call features.
Take the example of an absolute shift in interest rates in December 2015, when the Federal Reserve raised the federal funds rate by 25 basis points from 0% to 0.25% to a new range of 0.25% to 0.50%. This hike decreased the prices of all outstanding U.S. Treasury notes and bonds.
Special Considerations
Beyond the benchmark interest rate, shifts in investors' expectations can alter the yield curve, introducing yield curve risk. This risk comes from the curve steepening or flattening, which results from changing yields among similar bonds with different maturities.
For instance, in a steepening curve, the spread between short- and long-term rates widens as long-term rates rise more than short-term ones. If short-term rates exceed long-term rates, it creates an inverted yield curve.
In such cases, the price of long-term notes falls relative to short-term notes. The reverse happens with a flattening curve, where the spread narrows and short-term note prices decrease relative to long-term ones.
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