Treasury Bonds: What They Are and Why They Matter - NerdWallet (2024)

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What are Treasury bonds?

U.S. Treasury bonds are fixed-income securities. They're considered low-risk investments and are generally risk-free when held to maturity. That's because Treasury bonds are issued with the full faith and credit of the federal government. Since the U.S. government must find a way to repay the debt (and always has so far), the odds of Treasury bonds defaulting are extremely low.

Relative to higher-risk securities, like stocks, Treasury bonds have lower returns. Yet even during periods of low yields, U.S. Treasury bonds remain sought-after because of their perceived stability and liquidity, or ease of conversion into cash.

» Ready to get started? Learn more about how to buy Treasury bonds


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Are Treasury bonds taxable?

Treasury bonds are tax-advantaged. Interest income earned from Treasury bonds is subject to federal income taxes, but it is exempt from state and local income taxes.

Treasury bond rates

The current interest rate for a 20-year Treasury bond is 4.500%, while the rate of a 30-year bond is 4.250%. TreasuryDirect releases the bond auction schedule that includes information about Treasury interest rates and maturity dates.

Types of Treasury securities

Although the term "Treasury bonds" is often used as a catchall term for government bonds, Treasury bonds are only one type of Treasury security. The other two most popular are Treasury bills and Treasury notes. The distinguishing factor among these types of Treasury securities is simply the length of time until maturity, or expiration. Keep in mind that generally speaking, the longer the term, the higher the yield.

Treasury bills are short-term debt securities that mature in less than one year while Treasury notes are intermediate-term government debt securities that mature in two, three, five, seven and 10 years. Interest on Treasury notes is paid semiannually.

Treasury Inflation-Protected Securities (TIPS) are a type of Treasury bond, adjusted over time to keep up with inflation. (Learn more about TIPS.)

Investors in longer-term Treasurys (notes, bonds and TIPS) receive a fixed rate of interest, called a coupon, every six months until maturity, upon which they receive the face value of the bond. The price paid for the bond can be greater (sold at a premium) or less than (sold at a discount) the face value, depending on market demand.

» Learn more about the difference between Treasury bonds, notes and bills

Treasury Bonds: What They Are and Why They Matter - NerdWallet (4)

Are Treasury bonds a good investment?

Generally, yes, but that depends on your investing goals, your risk tolerance and your portfolio's makeup. With investing, in many cases, the higher the risk, the higher the potential return. This applies here.

Asset allocation is an investing concept and portfolio strategy for how to spread investment dollars among various asset classes, or groups of similar investments. Of the three most common —equities, bonds and cash —equities generally provide the greatest long-term growth potential, but are the most volatile. Cash has the least risk and lowest return to buffer volatility or cover unexpected expenses.

Bonds, like Treasurys, can generate income, usually have more modest returns, and can help balance out the volatility of stocks. Bonds are a common asset in a well-diversified portfolio.

But keep in mind, bonds are risk-free when held to maturity. As the Silicon Valley Bank crisis showed, bonds may be subject to interest rate risk.

» Try ourTreasury bond calculator

Why Treasury bonds are important

Proceeds from the sale of Treasury bonds go hand in hand with tax revenues to help the federal government finance its operations and repay outstanding U.S. debt.

As a longer-term bond, the 10-year Treasury bond is also used as a gauge for investor sentiment on the economy. It acts as a benchmark for longer-term interest rates, affecting other bonds, mortgages, car loans, personal loans, student loans, savings rates, etc.

Because Treasurys are considered a safer investment, demand is greater when investors are concerned about the state of the economy, which means Treasury bond prices rise, and their respective yields come down.

On the flip side, when the economy heats up and people are not as risk-averse, investors likely prefer higher-earning investments over safety and stability. Treasury bond prices often come down, and their respective yields increase.

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Treasury Bonds: What They Are and Why They Matter - NerdWallet (5)

How to buy Treasury bonds

You can purchase Treasury bonds directly from the Treasury Department through its website, TreasuryDirect, or through any brokerage account. (Don't have one? Here's how to open a brokerage account and start investing.)

Similar to other stocks and bonds, you can purchase Treasurys either individually or as a collection of securities through mutual funds or exchange-traded funds, or ETFs. If you have no particular time frame in mind for repayment, investing in a mutual fund or ETF may be more appealing because of enhanced diversification from owning a collection of bonds.

Unlike individual bonds, bond funds do not have a maturity date, and can therefore be subject to greater volatility. In a bond fund, a fund manager buys and sells bonds with varying terms, so your returns can be subject to market fluctuations when you sell the fund, instead of providing a predictable income.

Buying individual bonds can make sense when you’d like to pinpoint a specific time frame to receive the bond’s repayment. Examples include using bonds as a lower-risk way to earn some interest on money set aside for a certain purpose — think a wedding, tax or tuition payment next year — or as a way to generate a predictable income stream in retirement.

If you’re looking for short-term maturities, a money market fund can provide exposure because they are usually made up of Treasury bills and other shorter-term debt securities.

Next steps:

  • How to buy Treasury bonds

  • Best brokerages for bond investors

  • The 10-year Treasury yield: What it is and why it matters

  • How to buy bonds

Treasury Bonds: What They Are and Why They Matter - NerdWallet (2024)


Why are Treasury bonds important? ›

Treasury bonds are a good investment with the highest credit quality. They have tax advantages and are generally low risk. They earn interest until their maturity date, so they're good for earning steady cashflow.

What is the downside to buying Treasury bonds? ›

These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.

How do Treasury bonds work for dummies? ›

A Treasury bond, or "T-bond," is a debt issued by the U.S. government to raise money. When you buy a T-bond, you lend the federal government money, and it pays you a stated rate of interest until the loan comes due.

Are 20 year Treasury bonds a good investment? ›

While Treasury bonds don't have a serious risk that the government won't pay you back, they do have two other risks that are typical of bonds: inflation risk and interest rate risk. While Treasury bonds are relatively safe investments, one key risk is that inflation will erode your returns over the years.

What is one downside to investing in treasuries? ›

Interest Rate Risk

Just as prices can rise in an economy, so too can interest rates. As a result, Treasury bonds are exposed to interest rate risk. If interest rates are rising in an economy, the existing T-bond and its fixed interest rate may underperform newly issued bonds, which would pay a higher interest rate.

What is the point of buying Treasury bonds? ›

U.S. Treasury bonds are long-term debt securities. Treasury bonds mature in 20 or 30 years and pay interest every six months. When you purchase a Treasury bond, you are loaning money to the U.S. federal government. Treasury bonds are a low-risk investment that pays a fixed return and offers tax advantages.

Is it better to buy Treasury bills or bonds? ›

Both Treasury bonds and Treasury bills are low-risk debt securities issued by the federal government. T-bonds are designed for long-term investing, while T-bills have much shorter maturity periods. Both can help diversify your investment portfolio while shielding you from state and local taxes.

Do you pay taxes on Treasury bonds? ›

Interest from Treasuries is generally taxable at the federal level, but not at the state level. Interest from munis is generally exempt from federal taxes, and if you live in the state where the bond was issued, the interest may also be exempt from state taxes.

What happens to Treasury bonds when interest rates rise? ›

A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall. this phenomenon is known as interest rate risk.

How do you avoid tax on Treasury bonds? ›

The Treasury gives you two options:
  1. Report interest each year and pay taxes on it annually.
  2. Defer reporting interest until you redeem the bonds or give up ownership of the bond and it's reissued or the bond is no longer earning interest because it's matured.
Dec 12, 2023

How do you make money on Treasury bonds? ›

There are two ways to make money by investing in bonds. The first is to hold those bonds until their maturity date and collect interest payments on them. Bond interest is usually paid twice a year. The second way to profit from bonds is to sell them at a price that's higher than you initially paid.

How much do 1 year Treasury bonds pay? ›

1 Year Treasury Rate is at 5.20%, compared to 5.21% the previous market day and 4.80% last year. This is higher than the long term average of 2.95%. The 1 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 1 year.

Why would anyone buy a 10 year Treasury bond? ›

Government debt and the 10-year Treasury note, in particular, are considered among the safest investments. Its price often (but not always) moves inversely to the trend of the major stock market indexes. Central banks tend to lower interest rates in a recession, which reduces the coupon rate on new Treasurys.

How much is a $100 savings bond worth after 30 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount30-Year Value (Purchased May 1990)
$50 Bond$100$207.36
$100 Bond$200$414.72
$500 Bond$400$1,036.80
$1,000 Bond$800$2,073.60

What is the difference between a Treasury bill and a Treasury bond? ›

Key takeaways. Treasury bills have short-term maturities and pay interest at maturity. Treasury notes have mid-range maturities and pay interest every 6 months. Treasury bonds have long maturities and pay interest every 6 months.

Is it a good idea to invest in Treasury I bonds? ›

The pros of investing in I-bonds

In fact, I-bonds often outperform many of the highest-performing stocks as well during inflationary periods. These Treasury-issued bonds generate high returns without all the risks of those other high-yielding investments because they're backed by the U.S. government.

Can you lose money on bonds if held to maturity? ›

After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.

Is it a good time to buy Treasury bonds? ›

This time has been different: The 10-year Treasury yield has been hovering in a range above where it was when the Fed last hiked in July 2023. We believe the historical relationship should hold and we expect the 10-year Treasury ultimately to decline modestly from current levels as growth and inflation slow.

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