Treasury bonds in plain English
A U.S. Treasury bond is a long-term marketable debt security issued by the U.S. Department of the Treasury. TreasuryDirect states that Treasury bonds have original terms of 20 or 30 years, pay a fixed rate every six months, and return face value at maturity. The interest rate is determined at auction.
“Treasury” is a category, not one interchangeable product. Treasury bills mature in one year or less and are sold at a discount or par; Treasury notes have original terms from two through ten years; Treasury bonds have 20- or 30-year terms; TIPS adjust principal for inflation; and floating-rate notes reset their interest rate. Series I and EE savings bonds are nonmarketable savings products with different rules.
This page uses Treasury bond in the official 20- or 30-year sense. Financial commentary sometimes uses “Treasuries” or even “bonds” broadly for several maturities, so verify the CUSIP and maturity.
Core Treasury bond terms
- Face or par amount: the principal scheduled for payment at maturity.
- Coupon rate: the fixed annual interest rate established at the auction.
- Interest payment: paid every six months; a 4% coupon on $1,000 face value pays $20 twice a year.
- Maturity date: when Treasury is scheduled to repay face value.
- CUSIP: the identifier for the specific security.
- Auction date and issue date: when bidding occurs and when the security is delivered.
- Market price and yield: the secondary-market valuation after issuance.
TreasuryDirect says marketable securities are electronic and Treasury bonds can be bought in $100 increments. Current purchase limits, auction schedules, and account procedures can change, so verify them on TreasuryDirect for the transaction date.
How a Treasury auction sets the result
Treasury sells marketable securities through auctions. Investors can submit a noncompetitive bid, accepting the yield determined at auction, or eligible participants can submit a competitive bid that specifies a yield. Competitive bids can be accepted in full, accepted in part, or rejected under the auction rules.
The auction produces a high yield and determines the coupon and price under Treasury's calculation conventions. A bond can be issued at par, a discount, or a premium. The coupon rate and purchase yield are related but not necessarily identical because the coupon is set in prescribed increments while price adjusts.
For example, an investor can buy $1,000 face value but pay slightly less or more than $1,000 at issue. Semiannual coupon dollars are based on face value. The actual return depends on price, all payments, reinvestment, taxes, and whether the bond is held to maturity.
Read the auction announcement and results for exact dates, amounts, and terms. Do not rely on a remembered “Treasury rate,” because every outstanding maturity has its own market yield.
Buying through TreasuryDirect or a broker
Individual investors can buy eligible Treasury marketable securities through TreasuryDirect or through a bank, broker, or dealer. The routes differ.
TreasuryDirect supports noncompetitive auction purchases and holding securities in a Treasury account. It is not a conventional secondary-market trading platform. To sell a marketable security before maturity, an investor generally must transfer it to a bank, broker, or dealer, subject to TreasuryDirect's procedures and any holding requirements.
A broker can provide auction access and secondary-market trading, but fees, minimums, markups, platform features, custody, and transfer rules vary. Some brokers display a clean price without accrued interest; the confirmation shows total settlement consideration.
Compare account security, beneficiary and registration options, customer service, transfer timing, and the need for early liquidity. The lowest visible commission is not the only operational consideration for a 20- or 30-year holding.
Secondary-market price and yield
After issuance, Treasury bond prices fluctuate. For a conventional fixed coupon, price and market yield generally move in opposite directions. If new comparable yields rise, an older lower-coupon bond becomes less attractive and its price falls. If yields fall, its price generally rises.
A bond with $1,000 face value and a 3% coupon pays $30 a year regardless of whether it trades for $800, $1,000, or $1,200. The current yield therefore changes: 3.75% at $800, 3% at par, and 2.5% at $1,200. Yield to maturity also incorporates the pull from purchase price toward $1,000 at maturity.
Treasury bonds have long cash flows and can be highly sensitive to interest-rate changes. A 30-year Treasury can experience a large price decline even though the U.S. government continues making every scheduled payment. “Risk free” in discussions of credit does not mean price stable.
Duration and long-maturity risk
Duration estimates how much a bond's price may change for a yield movement under specified assumptions. Longer maturity and lower coupon generally produce greater duration. Convexity improves the approximation because the price-yield relationship is curved.
If a bond has an effective duration of 15 years, a one-percentage-point yield increase might imply roughly a 15% price decline before a convexity adjustment. This is an estimate, not an exact forecast. Yield-curve shifts need not be parallel, and transaction prices can reflect market conditions.
An investor who holds to maturity and receives all promised payments may recover face value, but an interim market loss remains economically relevant if the security must be sold, pledged, valued in a portfolio, or compared with new opportunities. Long maturity also creates inflation and opportunity-cost risk.
Credit, inflation, and reinvestment risk
Treasury marketable securities are backed by the full faith and credit of the United States. They are commonly used as a benchmark for low credit risk in U.S. dollars. They are not protected from every form of loss.
Inflation risk is central for a nominal Treasury bond. Fixed dollar payments may buy less after decades of rising prices. TIPS are a separate Treasury security whose principal adjusts with a specified inflation index; they introduce their own real-yield, tax, and deflation-floor considerations.
Reinvestment risk arises because semiannual coupons may be reinvested at lower rates than the yield-to-maturity assumption. Liquidity risk in on-the-run Treasuries is often low compared with many bonds, but off-the-run issues, stressed markets, retail transaction sizes, and platform spreads can still affect execution.
Opportunity cost matters too. Locking in a long nominal rate can underperform if future yields rise, even if no contractual payment is missed.
Treasury bonds versus savings bonds
Treasury bonds are marketable: their price can rise or fall, and they can be transferred for secondary-market sale under applicable procedures. Series I and EE savings bonds are registered nonmarketable securities with redemption restrictions, purchase limits, accrual rules, and tax options of their own.
An I bond's composite rate includes a fixed rate plus an inflation component that resets; a nominal Treasury bond's coupon does not reset for inflation. An EE bond accrues interest under savings-bond rules rather than paying a semiannual cash coupon.
Do not use “government bond” or “Treasury bond” as a substitute for reading the security title. Maturity, marketability, cash-flow timing, inflation treatment, and early-redemption rules can all differ.
STRIPS and zero-coupon Treasury exposure
Eligible Treasury principal and interest payments can be separated through the financial system into STRIPS—Separate Trading of Registered Interest and Principal of Securities. Each component becomes a zero-coupon security that pays at its specified maturity instead of making regular cash interest payments.
STRIPS can match a future liability precisely, but their long duration creates substantial price sensitivity. In taxable accounts, holders may owe federal income tax on imputed interest before receiving maturity cash. TreasuryDirect does not let individuals create STRIPS directly; market access and custody generally occur through financial institutions.
A STRIP is not the same cash-flow product as the coupon-bearing Treasury bond from which it originated.
Taxes
Treasury interest is subject to federal income tax but generally exempt from state and local income taxes. Gains, losses, original issue discount, market discount, premium amortization, and STRIPS can have additional rules. A state-tax exemption does not make the security tax free.
Taxable accounts, IRAs, retirement plans, trusts, and business accounts can produce different consequences and registration choices. Use current IRS guidance or qualified advice for a material holding, especially when buying at a discount or premium.
Treasury bonds in a portfolio
Long Treasuries can provide contractual U.S.-government cash flows, duration exposure, and potential price gains when long-term yields fall. They can also decline sharply when yields or inflation expectations rise. Their behavior is not identical to short Treasury bills, cash, corporate bonds, or a broad bond fund.
Match maturity with the spending horizon and risk capacity. A security needed for a known payment in 25 years can serve a different purpose from emergency cash needed next month. A ladder spreads maturities and reinvestment dates but does not eliminate rate or inflation risk.
Treasury funds add diversification and convenient reinvestment, but a conventional fund has no single maturity when an investor's original principal is returned. Inspect duration, maturity distribution, expenses, benchmark, use of derivatives, and distributions.
Common Treasury bond mistakes
- Calling every Treasury security a Treasury bond. Official bonds have 20- or 30-year original terms.
- Confusing coupon with yield. Purchase price affects investor return.
- Assuming government backing prevents price loss. Long-duration prices can move substantially.
- Treating TreasuryDirect as an instant trading account. Early sale generally requires transfer procedures.
- Ignoring inflation. Fixed nominal payments can lose purchasing power.
- Comparing one “Treasury rate” across maturities. Every point on the yield curve differs.
- Calling Treasury interest entirely tax free. Federal income tax generally applies.
- Confusing a bond with an I or EE savings bond. Marketability and cash flows differ.
- Assuming holding to maturity removes all risk. Inflation, opportunity cost, reinvestment, and liquidity needs remain.
A practical Treasury bond checklist
Record the CUSIP, issue and maturity dates, coupon, face amount, purchase price, accrued interest, yield to maturity, duration, and account location. Decide whether the goal requires a marketable 20- or 30-year bond, another Treasury maturity, TIPS, savings bonds, or a fund.
For an auction, read the announcement and results. For a secondary trade, compare exact CUSIPs, prices, yields, accrued interest, and platform compensation. Test the effect of higher and lower yields and inflation, then confirm how and when the money can be sold or transferred. Treasury credit strength does not replace maturity matching.