How Treasury Bonds Work — T-Bills, T-Notes, T-Bonds, and TIPS Explained
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Key Takeaways
US Treasuries come in four main types: T-Bills (under 1 year), T-Notes (2-10 years), T-Bonds (20-30 years), and TIPS (inflation-protected), each serving different investment needs.
The current yield curve as of February 2026 ranges from 3.69% on 3-month bills to 4.70% on 30-year bonds, offering positive real returns above the roughly 2.2% inflation rate.
Treasury interest is exempt from state and local income taxes, making Treasuries especially attractive for investors in high-tax states.
Individual investors can buy Treasuries commission-free through TreasuryDirect or brokerage accounts, with a minimum purchase of just $100.
While Treasuries are considered risk-free from a credit perspective, they carry interest-rate risk, inflation risk, and reinvestment risk that investors must weigh against their time horizon and goals.
The US Treasury market is the bedrock of global finance. With more than $27 trillion in outstanding marketable debt, Treasury securities set the baseline for virtually every interest rate in the economy — from your mortgage to your savings account. Whether you are a retiree seeking steady income, a young investor looking for portfolio ballast, or simply trying to understand what drives the numbers on CNBC's ticker, grasping how these instruments work is essential financial literacy.
As of late February 2026, the Treasury yield curve offers a revealing snapshot of where the economy stands. Short-term bills yield around 3.69%, while the benchmark 10-year note sits at 4.05% and the 30-year bond pays 4.70%. The Federal Reserve has cut the federal funds rate to 3.64% from its 2025 peak of 4.33%, and the yield curve has returned to a normal upward slope after its prolonged inversion. For investors, this creates a genuine opportunity to lock in yields that exceed inflation — but only if you understand the differences between the four main types of Treasury securities and how to buy them.
This guide breaks down everything you need to know: what T-Bills, T-Notes, T-Bonds, and TIPS are, how Treasury auctions work, where to buy them, and when they make sense in your portfolio.
What Are US Treasury Securities and Why Do They Matter?
US Treasury securities are debt obligations issued by the United States Department of the Treasury to finance government spending. When you buy a Treasury, you are lending money to the federal government in exchange for a promise to repay your principal plus interest. Because the US government has the power to tax and, ultimately, to print the currency in which its debts are denominated, Treasuries are considered the closest thing to a "risk-free" investment in global finance.
This risk-free status gives Treasury yields an outsized role in the financial system. The 10-year Treasury yield, currently at 4.05%, serves as the benchmark for mortgage rates, corporate bond pricing, and equity valuation models. When Treasury yields rise, borrowing costs increase across the entire economy. When they fall, credit conditions loosen. Central banks around the world — from the Bank of Japan to the European Central Bank — hold trillions in US Treasuries as reserve assets, reinforcing the dollar's status as the world's reserve currency.
For individual investors, Treasuries offer three key advantages. First, they provide predictable income with virtually no credit risk. Second, interest earned on Treasuries is exempt from state and local income taxes, making them especially attractive in high-tax states like California and New York. Third, they tend to rally during stock market sell-offs, providing genuine portfolio diversification when you need it most.
The Four Types of Treasury Securities
How Treasury Auctions Work
How to Buy Treasury Securities
Why Treasuries Are Considered Risk-Free — and the Risks That Remain
When Treasuries Make Sense in Your Portfolio
Conclusion
US Treasury securities remain the foundation of conservative investing and the anchor of the global financial system. Whether you choose T-Bills for short-term cash management, T-Notes for medium-term income, T-Bonds for long-duration yield, or TIPS for inflation protection, each instrument serves a distinct purpose in a well-constructed portfolio.
The current yield environment — with the 10-year at 4.05%, the 30-year at 4.70%, and real yields comfortably positive — represents a meaningfully better opportunity for bond investors than anything available in the 2010s or early 2020s. The Fed has begun its cutting cycle, moving the funds rate from 4.33% to 3.64%, but long-term rates remain elevated, creating an upward-sloping yield curve that rewards investors for extending duration.
For most investors, the practical path is straightforward: open a brokerage account, buy Treasuries at auction with no commissions, and build a ladder matched to your income needs and time horizon. Treasuries will not make you rich, but they will protect what you have — and in an uncertain world, that reliability has real value.
Disclaimer: This content is AI-generated for informational purposes only and does not constitute financial advice. Consult qualified professionals before making investment decisions.
The Treasury Department issues four main types of marketable securities, each designed for different investment horizons and needs. Understanding their differences is the key to choosing the right one for your situation.
Treasury Bills (T-Bills)
T-Bills are the shortest-duration Treasury securities, maturing in 4, 8, 13, 17, 26, or 52 weeks. Unlike notes and bonds, T-Bills do not pay periodic interest. Instead, they are sold at a discount to their face value and you receive the full par value at maturity. The difference between what you pay and what you receive is your return.
For example, you might buy a 26-week T-Bill with a $10,000 face value for $9,815. At maturity, you receive $10,000, earning $185 in interest. According to Treasury.gov data, the average interest rate on outstanding T-Bills was 3.76% as of January 2026 — the highest rate across all marketable security types, reflecting the current shape of the short end of the yield curve.
T-Bills are ideal for parking cash you will need within a year. They function as a higher-yielding alternative to savings accounts or money market funds, with the full backing of the US government.
Treasury Notes (T-Notes)
T-Notes are medium-term securities issued with maturities of 2, 3, 5, 7, or 10 years. They pay a fixed coupon (interest rate) every six months and return your principal at maturity. The 10-year Treasury note is the single most important benchmark in fixed income markets — its yield of 4.05% as of February 25, 2026 directly influences mortgage rates and is the reference point for corporate bond spreads.
The average coupon rate on outstanding T-Notes was 3.169% as of January 2026, reflecting the mix of notes issued when rates were both lower (during the 2020-2021 era) and higher (2023-2024). New-issue notes carry coupons closer to current market yields.
T-Notes are the workhorse of most bond portfolios. A 2-year note (yielding 3.45%) offers relatively low interest-rate risk, while a 10-year note (4.05%) provides higher income but more price sensitivity to rate changes. The 5-year note at 3.61% and 7-year at 3.82% offer middle-ground options.
Treasury Bonds (T-Bonds)
T-Bonds are long-duration securities issued with 20-year and 30-year maturities. Like T-Notes, they pay semiannual coupons, but their extended time horizon means they carry significantly more interest-rate risk. A 1-percentage-point rise in yields can cause a 30-year bond's price to drop roughly 15-20%.
The 30-year bond currently yields 4.70%, and the 20-year yields 4.63%. The average coupon on outstanding T-Bonds is 3.369%, reflecting the blend of issuances across different rate environments. The premium that long bonds offer over shorter maturities — the 30-year yields 1.25 percentage points more than the 2-year — compensates investors for the added duration risk.
T-Bonds are best suited for investors with long time horizons who want to lock in high nominal yields, such as pension funds, endowments, or retirees building a bond ladder that extends decades into the future.
Treasury Inflation-Protected Securities (TIPS)
TIPS are unique among Treasury securities because their principal value adjusts with the Consumer Price Index (CPI). If inflation rises, your principal increases; if deflation occurs, your principal decreases (though it can never fall below the original par value at maturity). TIPS pay a fixed real coupon rate on this adjusting principal, so your interest payments grow alongside inflation.
The average real yield on outstanding TIPS was 0.983% as of January 2026. TIPS are issued with 5-year, 10-year, and 30-year maturities. The CPI index stood at 326.588 in January 2026, up from 319.679 a year earlier — representing roughly 2.2% annual inflation, which is close to the Fed's target.
TIPS are valuable as an inflation hedge within a diversified portfolio. If inflation unexpectedly accelerates, TIPS will outperform nominal Treasuries. However, if inflation remains contained (as it currently appears to be), nominal Treasuries with their higher stated yields will deliver better total returns.
The Treasury Department sells new securities through a regular auction process managed by the Bureau of the Fiscal Service. Understanding this process helps explain why yields move the way they do and how the government finances its operations.
The Auction Schedule. The Treasury follows a predictable calendar. T-Bills are auctioned weekly (4-week and 8-week bills every Tuesday, 13-week and 26-week bills every Monday). T-Notes are auctioned monthly, with the 2-year and 5-year notes typically offered at month-end and the 10-year note in the middle of the month. The 30-year bond is auctioned quarterly. The Treasury announces auction sizes and dates in its quarterly refunding statement, which bond markets watch closely.
Competitive vs. Non-Competitive Bids. There are two ways to participate. In a competitive bid, you specify the yield you are willing to accept. If your bid is at or below the yield that clears the auction (the "stop-out yield"), you win securities at that rate. Large institutional investors — banks, hedge funds, foreign central banks — submit competitive bids through primary dealers, the roughly two dozen financial institutions authorized to trade directly with the Fed.
In a non-competitive bid, you agree to accept whatever yield the auction determines. In exchange, you are guaranteed to receive your full allocation (up to $10 million per auction). This is how most individual investors participate through TreasuryDirect. Non-competitive bids are filled first, then competitive bids fill the remainder.
Why Auctions Matter. Auction results are closely watched market events. Strong demand (measured by the "bid-to-cover ratio" — total bids divided by the amount offered) signals investor confidence in Treasuries and can push yields lower. Weak demand, or "tailing" (when the auction clears at a higher yield than pre-auction trading implied), can rattle bond markets. With the government needing to refinance trillions in maturing debt each year, auction dynamics have become an increasingly important driver of yield movements.
Individual investors have three main channels for purchasing Treasuries, each with different trade-offs in terms of cost, convenience, and flexibility.
TreasuryDirect
TreasuryDirect (treasurydirect.gov) is the US government's online platform for buying Treasuries directly at auction. There are no fees, no commissions, and no middleman. You can purchase T-Bills, T-Notes, T-Bonds, TIPS, and savings bonds (Series I and EE) directly from your bank account.
The advantages are clear: zero cost and the security of dealing directly with the government. The drawbacks are equally real: the website interface is dated, you cannot sell securities before maturity on the platform (you must transfer them to a brokerage account first), and there is no portfolio management or tax reporting integration. TreasuryDirect is best for buy-and-hold investors who plan to hold their Treasuries to maturity.
Brokerage Accounts
Most major brokerages — Fidelity, Charles Schwab, Vanguard, Interactive Brokers — allow you to buy Treasuries both at auction (through the broker's auction order system) and on the secondary market. Buying at auction through a broker is typically commission-free, just like TreasuryDirect. Buying on the secondary market involves a small bid-ask spread but gives you the flexibility to choose exact maturities and sell before maturity if needed.
Brokerage accounts offer several practical advantages over TreasuryDirect: integrated tax reporting (1099 forms), the ability to hold Treasuries alongside stocks and other assets, and easy liquidation on the secondary market. For most investors, buying Treasuries through a brokerage is the most practical approach.
Treasury ETFs and Mutual Funds
For investors who want Treasury exposure without managing individual bonds, exchange-traded funds (ETFs) offer instant diversification and daily liquidity. Popular options include the iShares 1-3 Year Treasury Bond ETF (SHY) for short duration, the iShares 7-10 Year Treasury Bond ETF (IEF) for intermediate exposure, and the iShares 20+ Year Treasury Bond ETF (TLT) for long-duration bets.
ETFs charge a small expense ratio (typically 0.05-0.15% annually) and trade like stocks throughout the day. The trade-off is that unlike individual Treasuries, ETFs do not have a fixed maturity date. They perpetually roll their holdings, which means you are always exposed to interest-rate risk — you cannot simply hold to maturity and collect your principal. This distinction is important: an individual Treasury held to maturity has zero price risk, while a Treasury ETF can lose value in a rising-rate environment.
The "risk-free" label attached to US Treasuries refers specifically to credit risk — the risk that the borrower will fail to pay. Since the US government controls both the world's largest tax base and the Federal Reserve (which can, in extremis, create dollars), the probability of an outright default is effectively zero. This is why the US has maintained its sterling credit reputation for over two centuries, despite occasional political brinkmanship over the debt ceiling.
But risk-free does not mean riskless. Treasuries are subject to several other types of risk that investors must understand.
Interest-Rate Risk. When yields rise, existing Treasury prices fall. The longer the maturity, the larger the price impact. During 2022-2023, as the Fed raised rates from near zero to over 5%, long-term Treasury bonds lost more than 30% of their market value — a historically painful drawdown for supposedly "safe" assets. If you hold to maturity, this paper loss does not matter. But if you need to sell early, interest-rate risk is very real.
Inflation Risk. A Treasury paying a fixed 4% coupon loses purchasing power if inflation runs at 5%. This is the core risk of nominal Treasuries and exactly what TIPS are designed to address. With CPI currently running around 2.2% annually and the 10-year yielding 4.05%, investors are earning a positive real yield of roughly 1.85% — a comfortable margin, but one that could narrow if inflation reaccelerates.
Reinvestment Risk. If you are building a ladder of short-term T-Bills yielding 3.69% today, there is no guarantee you will be able to reinvest at similar rates when they mature. If the Fed continues cutting rates (it has already moved from 4.33% to 3.64%), future T-Bill yields could be significantly lower. Longer-term notes and bonds lock in current yields, protecting against this specific risk.
Opportunity Cost. Treasuries are safe, but they have historically underperformed stocks over long periods. The 4-5% yields available today are attractive relative to the near-zero rates of 2020-2021, but they may lag equity returns over a full market cycle. The right allocation depends on your time horizon, risk tolerance, and income needs.
There is no one-size-fits-all answer to how much of your portfolio should be in Treasuries, but several scenarios make a particularly strong case for including them.
You are approaching or in retirement. Treasuries provide the most reliable income stream available. A ladder of T-Notes maturing every year for the next decade, yielding between 3.45% and 4.05% today, can fund living expenses regardless of what the stock market does. For retirees, this predictability is worth more than the potentially higher — but uncertain — returns from equities.
You want portfolio insurance. During the 2020 COVID crash, the 2008 financial crisis, and virtually every other equity sell-off of the past century, long-term Treasuries rallied as investors fled to safety. Allocating 20-40% of a portfolio to Treasuries can significantly reduce volatility and drawdowns, even if it slightly reduces long-term returns.
You have a specific spending goal. If you know you will need $50,000 for a home down payment in three years, a 3-year T-Note eliminates all uncertainty. You know exactly what you will receive and when. No savings account, CD, or money market fund offers the same combination of safety and yield.
You are worried about deflation or recession. In a deflationary downturn, nominal Treasury bonds are among the best-performing assets. Their fixed payments become more valuable in real terms as prices fall, and their prices rise as the Fed cuts rates aggressively. Today's yield curve — with the 10-year at 4.05% and the Fed already cutting — suggests the market sees a soft-landing scenario, but Treasuries provide insurance if the outcome is worse.
Current yields are historically attractive. With the 10-year above 4% and the 30-year near 4.70%, today's yields are well above the sub-2% levels that prevailed for much of the 2010s. While they are down from the 2023-2024 peaks near 5%, they still offer meaningful real income above inflation. For investors who have been underweight bonds for years, this is a reasonable entry point.