Treasury Bills, Notes, Bonds and TIPS: A Complete Guide

The Treasury borrows on a published calendar whether markets are calm or frightened, whether the government is popular or not, and whether anyone is paying attention. Bills are auctioned weekly, notes and bonds monthly or quarterly. The results settle through the Federal Reserve. That regularity is not decoration. It is the reason Treasury yields became the reference rate against which almost every other loan in the American economy is priced, and it took the better part of a century to build, beginning with the first Treasury bill auctions in 1929 and the gradual replacement of one-off wartime borrowing drives with a routine that never stops.

Four instruments cover the whole curve. They differ in how long the money is committed and in whether the payments are adjusted for inflation. Nothing else about them matters.

Bills: two rates on the same piece of paper

Treasury bills mature in one year or less. Common terms are 4, 8, 13, 26 and 52 weeks. They pay no interest along the way. You buy below face value. At maturity you receive $100 per $100 of face, and the gap is the return.

Take a 13-week bill bought at $98.75 per $100 of face value. The gain is $1.25 over 91 days. The Treasury publishes that return two ways:

• The bank discount rate uses face value and a 360-day year: ($1.25 / $100) x (360 / 91) = 4.95%.
• The investment rate uses what you actually paid and a 365-day year: ($1.25 / $98.75) x (365 / 91) = 5.08%.

Both figures print on the auction result, thirteen basis points apart. They describe the same bill. The second is the one comparable with a savings account or a coupon bond, and the conventions behind the first are explained in bond yields explained.

Because they mature so soon, bills carry almost no price risk. That is what makes them the cash instrument of the institutional world.

Notes and bonds: the coupon end

Treasury notes are issued in 2, 3, 5, 7 and 10-year maturities. Treasury bonds run 20 and 30 years. Both pay a fixed coupon every six months and repay face value at maturity, so a 4% note on $10,000 of face value pays $200 in one month and $200 six months later, whatever the market is doing in between.

The ten-year note is the benchmark of the entire market. Mortgage rates, corporate borrowing costs and equity valuation models all reference it, which is why a move in the ten-year yield gets reported as news about the economy.

Price risk grows with maturity, and it grows faster than most buyers expect. A thirty-year bond can lose a quarter of its market value in a year of rising yields while carrying no credit risk at all, which is the distinction drawn at length in duration and interest rate risk.

The thirty-year, which vanished and came back

On the last day of October 2001, the Treasury announced that it would stop issuing the thirty-year bond, and the reasoning was fiscal: surpluses were projected, borrowing needs were expected to shrink, and the longest maturity was the expensive one to keep. Long bond prices moved violently within the afternoon, because a security whose supply has just been capped forever is a different asset from one that will be reissued every quarter.

The projections did not survive. In February 2006, the thirty-year came back. The twenty-year, which had not been issued since 1986, returned in 2020. The episode is worth remembering whenever someone explains the long end of the curve purely in terms of expectations about growth, because supply is a decision made by a borrower with its own problems, and that decision can change between one quarterly refunding announcement and the next.

TIPS: principal that moves with the index

Treasury inflation-protected securities were first auctioned in 1997. They are issued in 5, 10 and 30-year maturities, the coupon rate is fixed and usually low, and the principal is indexed to the consumer price index.

Work an example with round numbers. You hold $1,000 of a TIPS with a 1.5% coupon. Over a year the index rises 3%, so the principal is adjusted to $1,000 x 1.03 = $1,030. The next full year of coupons is 1.5% x $1,030 = $15.45, up from $15.00. At maturity you are repaid the adjusted principal. Should the index have fallen over the life of the bond, the Treasury’s own description of the terms settles it: you are paid the adjusted principal or the original principal, whichever is greater.

The yield quoted on a TIPS is a real yield, a return above inflation, which is why it looks so much smaller than the nominal yield on an ordinary Treasury of the same maturity. The gap between the two is the breakeven inflation rate. Own either one at that rate and the outcome is the same. Compare any nominal yield with its real equivalent using the real return calculator, and remember that the index doing the adjusting is itself a constructed number with revisions, lags and a basket someone had to choose.

The auction, and why every winner pays the same price

Each auction takes two kinds of bid. Competitive bidders, mostly dealers and institutions, name the yield they will accept. Noncompetitive bidders, which is how individuals take part, agree in advance to whatever yield the auction produces and are guaranteed their full amount up to the published limit.

The Treasury fills competitive bids from the lowest yield upward until the issue is sold, and the yield of the last bid accepted becomes the high yield, at which point here is the part worth knowing: every successful bidder pays that same price, including the ones who would have accepted less. It was not always done this way. Treasury auctions once filled each winning bid at its own price, which rewarded bidders who could guess the clearing level and punished everyone else, and after a bid-rigging scandal at one primary dealer in 1991 the Treasury began experimenting with uniform pricing on two-year and five-year notes. By the end of the 1990s the single-price method applied to all marketable securities. The change removed the incentive to shade a bid for fear of overpaying, which is one of the few market reforms that worked in the direction it was intended to.

Reading the result

Three figures from the result sheet carry most of the information.

Figure	How it is calculated	What a weak reading looks like
Bid-to-cover	Total bids divided by the amount sold	Below the recent average, near 2.0 on a note
The tail	Auction high yield minus the when-issued yield just before	A positive tail, for example 4.32% against 4.30%
Indirect bidders	Share allotted through a dealer, largely foreign accounts	A low share, leaving dealers holding more

A tail of 2 basis points means buyers demanded a slightly higher yield than the market had assumed moments earlier, and prices across the curve adjust within seconds. Auction results are one of the few scheduled events at which the price of government credit is set in the open, with the arithmetic published afterwards, which makes them better evidence than most of what gets written about demand for government debt.

Buying them

TreasuryDirect is the government’s own platform and charges nothing. You open an account and link a bank account. Then you place noncompetitive bids at the scheduled auctions. A brokerage account reaches the same auctions and also the secondary market, where you can buy a Treasury that already exists and matures on precisely the date you need, which is the more useful route for anyone building a ladder.

For anything beyond a single maturity, most investors use funds. A Treasury ETF holds a rolling basket and never matures. What you own is a permanent position in one part of the curve. Bond ETFs explained covers what that swaps away.

Series I savings bonds, which are a different animal

Series I savings bonds sit beside the tradeable securities. They behave differently in almost every respect. They date from 1998, and the rate combines a fixed rate that lasts for the life of the bond with an inflation rate reset every six months. They cannot be traded or sold. They must be held at least twelve months, and they forfeit three months of interest if cashed within five years. Electronic purchases are capped per person per calendar year. Confirm the limit at TreasuryDirect before planning around it.

None of that makes them bad. All of it makes them something other than a bond. There is no market price. There is no interest rate risk, and no chance of selling at a gain. What you hold is a savings account with a government guarantee, an inflation adjustment and a lock on the door for the first year.

Where Treasuries disappoint

The failure is almost never the payment. The Bloomberg US Aggregate index had never recorded a calendar year as bad as 2022, and Treasuries were a large part of that index, yet every coupon was paid on schedule, every maturity was honoured, and holders still took a substantial loss on market value, which tells you the promise and the price are answering different questions.

The second failure is quieter and takes longer to notice. A yield locked in below the inflation rate loses purchasing power every year with perfect reliability, which is what a negative real yield means once the euphemism is stripped out. Both failures concern the price of money, and the creditworthiness of the borrower was never in question. Both are governed by the policy described in how the Federal Reserve works.

To see how yields at these maturities line up against one another, use the yield curve tool alongside the yield curve explained. To price an individual bill or note yourself, the bond yield calculator takes a price and gives back a yield, and how bonds work shows where that arithmetic comes from.