Treasury Bills Notes And Bonds Differ Mainly By Time

The United States Treasury issues marketable debt in three main forms. They are the same obligation from the same issuer, separated principally by how long the money is borrowed for.

The three maturities and how each pays

Bills mature in a year or less and pay no periodic interest. They are sold below face value and redeemed at face, with the difference constituting the return.

Notes cover intermediate maturities and pay a fixed coupon twice a year, returning principal at maturity. Bonds work identically over the longest maturities issued.

The structural difference between a note and a bond is therefore only length. The difference between both and a bill is that bills have no coupon at all.

Auctions set the yield, not the Treasury

New securities are sold at auction. Competitive bidders specify a yield they will accept, and the auction clears at the level that sells the offered amount.

Non-competitive bidders accept whatever that clearing yield turns out to be, which is how smaller purchasers typically participate.

The result is that the yield reflects what buyers demanded on that day rather than a rate anyone announced in advance.

Duration explains why long bonds move more

A bond's price adjusts so that its fixed payments produce the yield the market currently requires. The further out those payments sit, the larger the adjustment must be.

A thirty-year bond therefore experiences much larger price swings for the same change in market yields than a two-year note does.

A bill held to maturity has very little of this exposure, which is why short Treasuries behave more like cash and long ones behave like a volatile asset.

Holding to maturity changes the question

An investor who holds a Treasury to maturity receives the stated payments and the face value regardless of what the price did along the way.

An investor who must sell early realizes whatever the market will pay, which may be above or below what was paid for it.

Bond funds hold continuously rolling portfolios and never mature, so the fund's value reflects current prices at all times rather than any individual security's maturity.

Inflation-indexed securities are a separate instrument

The Treasury also issues securities whose principal adjusts with a published inflation measure, with the coupon applied to the adjusted principal.

These pay a real yield rather than a nominal one, meaning the return is expressed after the inflation adjustment rather than before it.

They therefore answer a different question from a conventional Treasury, and their prices respond to changes in expected inflation as well as to changes in real rates.