What Is Treasury Bonds?
Treasury bonds, often referred to as T-bonds, are long-term debt securities issued by the U.S. federal government. They represent a loan made by an investor to the U.S. government, which, in turn, uses these funds to finance its various expenditures and operations. As a core component of fixed-income securities, Treasury bonds are generally considered among the safest investments available because they are backed by the full faith and credit of the U.S. government, implying minimal default risk. Treasury bonds typically come with original maturity dates of 20 or 30 years, paying a fixed interest rate every six months until maturity.32
History and Origin
The issuance of government debt instruments by the United States dates back to its early days, primarily to finance wars and public spending. However, the modern form of Treasury bonds evolved significantly over time. To finance the costs of World War I, for instance, the U.S. government issued "Liberty bonds," marking a significant period of public participation in government financing. Following various issuances and changes in maturity periods, 30-year bond issues became a regular feature of the Treasury's refunding operations by 1977, replacing earlier 25-year bond issues.31 The U.S. Treasury Department now auctions 20-year and 30-year Treasury bonds at original issue in February, May, August, and November.30
Key Takeaways
- Treasury bonds are long-term debt instruments issued by the U.S. government, typically with 20- or 30-year maturities.29
- They pay a fixed coupon payment every six months until their maturity date.28
- Considered virtually risk-free investments due to the backing of the U.S. government, they often serve as a benchmark for other fixed-income securities.
- Investors can purchase Treasury bonds directly from the U.S. Treasury via TreasuryDirect or through brokerage firms.26, 27
- Interest earned on Treasury bonds is exempt from state and local income taxes but is subject to federal income tax.25
Formula and Calculation
The value and return of a Treasury bond involve several components, primarily the par value, coupon rate, and yield to maturity. The semi-annual interest payment (coupon payment) can be calculated as:
For example, a $1,000 par value Treasury bond with a 5% annual coupon rate pays:
The price of a bond in the secondary market fluctuates based on prevailing interest rates and investor demand, affecting its yield to maturity. When purchasing a Treasury bond at auction, the initial yield is determined by the accepted bids.
Interpreting Treasury Bonds
Interpreting Treasury bonds involves understanding their role in the broader financial landscape. Their low-risk nature makes them a fundamental component in many investment portfolios. The yield on a Treasury bond is a crucial indicator, reflecting the return an investor can expect if they hold the bond until its maturity. This yield is influenced by various macroeconomic factors, including inflation expectations, economic growth forecasts, and the Federal Reserve's monetary policy.23, 24
A rising yield on Treasury bonds often signals expectations of higher inflation or a stronger economy, which can lead to the Federal Reserve increasing short-term interest rates. Conversely, a falling yield may suggest economic slowdowns or a flight to safety during periods of market uncertainty. The relationship between different Treasury maturities forms the yield curve, which is a key economic indicator often used to predict future economic activity, including potential recessions.22
Hypothetical Example
Consider an investor who purchases a 30-year Treasury bond with a par value of $1,000 and a 4% annual coupon rate directly from the U.S. Treasury at auction.
- Purchase: The investor pays $1,000 for the bond.
- Semi-Annual Payments: Every six months, the investor receives a coupon payment: $($1,000 \times 0.04) / 2 = $20$.
- Total Interest Income: Over 30 years, the investor receives $20 \times 2 \times 30 = $1,200$ in total interest payments.
- Maturity: At the end of 30 years, the bond matures, and the investor receives the original par value of $1,000 back.
This example illustrates the fixed nature of the interest payments and the principal repayment characteristic of these financial instruments when held to maturity.
Practical Applications
Treasury bonds serve several important practical applications in investing and financial markets:
- Portfolio Diversification: Treasury bonds are often used for diversification in an investment portfolio. Their low correlation with riskier assets like stocks can help reduce overall portfolio volatility, especially during periods of market downturns.21
- Safe Haven Asset: During times of economic or geopolitical uncertainty, investors often flock to Treasury bonds as a "safe haven" asset. Their perceived safety helps preserve capital when other markets are experiencing declines.
- Income Generation: For investors seeking a steady stream of income, Treasury bonds provide predictable semi-annual interest payments.20
- Benchmark for Interest Rates: The yields on Treasury bonds are considered a benchmark for other interest rates in the economy, influencing everything from mortgage rates to corporate bond yields.
- Monetary Policy Tool: The Federal Reserve actively participates in the secondary market for Treasury securities, buying and selling them to influence the money supply and implement monetary policy. As of July 2025, the Federal Reserve held a significant amount of U.S. Treasury securities as part of its asset portfolio.17, 18, 19
Investors can purchase Treasury bonds directly through the U.S. Department of the Treasury's online platform, TreasuryDirect.15, 16
Limitations and Criticisms
While Treasury bonds are lauded for their safety, they are not without limitations and criticisms. One primary drawback is their typically lower returns compared to more volatile assets like stocks, especially during periods of low interest rates.14 This lower yield may not be sufficient for investors with aggressive growth targets or those facing high rates of inflation.
Furthermore, despite their low default risk, Treasury bonds are subject to interest rate risk. If interest rates rise after an investor purchases a Treasury bond, the market value of the existing bond will fall, making it less attractive than newly issued bonds with higher coupon rates.13 While an investor holding the bond to maturity will still receive the full par value, selling it before maturity could result in a capital loss.
Recent research has also raised questions about the valuation of U.S. Treasuries, suggesting they might be overvalued when considering realistic projections of future U.S. economic performance and the government's ability to service its growing debt. This "government debt valuation puzzle" implies a potential disconnect between market value and underlying fiscal backing.12 Such perspectives highlight the importance of a nuanced understanding of Treasury bonds within a broader economic context. The rapid increase in Treasury issuance and uncertainty about the economic outlook were factors contributing to a significant rise in Treasury yields in late 2023, a phenomenon some analysts referred to as a "Treasury Tantrum."11
Treasury bonds vs. Treasury notes
Treasury bonds and Treasury notes are both debt securities issued by the U.S. government, sharing the common characteristics of being backed by the full faith and credit of the U.S. government and paying semi-annual interest. However, their primary distinction lies in their maturity periods. Treasury bonds are long-term instruments, typically issued with maturities of 20 or 30 years.10 In contrast, Treasury notes are medium-term securities, with maturities ranging from two to 10 years.9 This difference in maturity significantly impacts their sensitivity to interest rate changes; longer-term Treasury bonds generally exhibit greater price volatility than shorter-term Treasury notes when interest rates fluctuate.8 Both are part of the broader category of U.S. Treasury securities, which also includes short-term Treasury bills.
FAQs
How do you buy Treasury bonds?
You can buy Treasury bonds directly from the U.S. government through the TreasuryDirect website, which offers auctions for new issues. Alternatively, you can purchase them on the secondary market through a bank, brokerage firm, or mutual fund.5, 6, 7
Are Treasury bonds safe investments?
Yes, Treasury bonds are widely considered among the safest investments because they are backed by the full faith and credit of the U.S. government, making the likelihood of default extremely low.
Do Treasury bonds pay interest?
Yes, Treasury bonds pay a fixed interest rate every six months until their maturity date, at which point the investor receives the bond's face value.4
What happens if I sell a Treasury bond before maturity?
If you sell a Treasury bond before its maturity date on the secondary market, its price will fluctuate based on prevailing interest rates. You might sell it for more or less than its original purchase price, potentially resulting in a capital gain or loss.2, 3
Are Treasury bonds taxed?
Interest income from Treasury bonds is subject to federal income tax, but it is exempt from state and local income taxes.1