What Is a Treasury Note?
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What Is a Treasury Note?

4 Min.

A Treasury note is a debt security issued by the U.S. government. It has a fixed interest rate and a maturity period ranging from two to ten years. Investors can acquire Treasury notes through competitive or non-competitive bids. In competitive bids, investors specify the desired yield, while in non-competitive bids, they accept the predetermined yield. Treasury notes are similar to Treasury bonds, but the latter have longer maturities from 20 to 30 years.

Basics

Within marketable government debt, Treasury notes (T-notes) emerge as distinctive financial instruments characterized by a steadfast interest rate and a lifespan ranging from 2 to 10 years. Prospective investors engage with the government in the acquisition of Treasury notes through two avenues: competitive or non-competitive bids. Opting for a competitive bid involves investors stipulating their desired yield, though approval remains uncertain. Alternatively, non-competitive bids require investors to accept the auction-determined yield without specification.

Exploring Treasury Notes

Distinguished by varying durations of two, three, five, seven, and ten years, Treasury notes prove to be favored investments bolstered by a robust secondary market that enhances liquidity. Biannual interest disbursements characterize these notes, maintaining a non-taxable status at municipal and state levels, while federal taxation mirrors that of Treasury bonds and bills.

Within U.S. Treasury-issued debt investments, notes, bonds, and bills emerge as distinct entities. Their divergence lies in the duration of maturity, with Treasury bonds extending beyond 10 years, reaching up to 30 years: a testament to their status as the lengthiest sovereign fixed-income security.

Treasury Notes and Interest Rate Dynamics

The susceptibility of T-notes to interest rate risks intensifies with their extended maturity. Beyond credit strength, the value of a note or bond hinges on its responsiveness to fluctuations in interest rates. These alterations commonly stem from central bank interventions or shifts in the yield curve.

Furthermore, fixed-income instruments exhibit varied degrees of sensitivity to rate changes, leading to diverse magnitudes of price depreciation. This sensitivity is quantified by duration, denoted in years, with factors such as coupon, yield, present value, final maturity, and call features contributing to its calculation.

A pivotal instance of a significant interest rate shift unfolded in December 2015, as the Federal Reserve (the Fed) raised the federal funds rate by 25 basis points. Transitioning from the 0% to 0.25% range, the rate settled at 0.25% to 0.50%, prompting a consequential reduction in the prices of all existing U.S. Treasury notes and bonds.

Yield Curve Dynamics and Interest Rate Risks

Beyond the benchmark interest rate, alterations in investor expectations contribute to fluctuations in the yield curve, presenting what is termed as yield curve risk. This risk materializes in the form of a steepening or flattening of the yield curve, resulting from changing yields among bonds of similar quality but differing maturities.

Illustratively, a steepening curve manifests when the gap between short- and long-term interest rates widens due to a more pronounced increase in long-term rates compared to short-term rates. Conversely, an inverted yield curve emerges if short-term rates surpass any of the longer-term rates. Consequently, the value of long-term notes diminishes relative to short-term notes during a steepening yield curve, whereas the opposite transpires in the case of a flattening yield curve, causing short-term notes to depreciate relative to long-term notes.

Conclusion

Treasury notes represent a cornerstone of U.S. government debt securities, characterized by fixed interest rates and maturities spanning two to ten years. The acquisition process, whether through competitive or non-competitive bids, adds flexibility for investors. Distinct from Treasury bonds, these notes play a crucial role in the market, showcasing resilience amid interest rate dynamics. As evidenced by the Federal Reserve's 2015 rate adjustment, their value is subject to intricate relationships with interest rates. The intricate interplay of yield curve dynamics further underscores the nuanced nature of Treasury note investments, with shifts impacting the relative value between short and long-term notes.

Treasury Note
Competitive Bid
Non-Competitive Bid