Investing in Treasury Bonds, Bills, and Notes as a High-Yield Savings Option

Most of us understand that stashing money in a savings account at your local bank isn’t the best way to earn a good return. While it is a secure and highly liquid savings option, with the APY sitting at around 0.6% right now (as of December 2023), you won’t be able to do much with the money you earn.

Of course, there are other savings options out there with varying risks and liquidity. One option is to invest in treasury bonds, bills, and notes. Why? As of December 2023, yields for treasury securities are sitting in the 4.2% – 5.4% range, making them a high-yield and low-risk savings option.

The Difference Between Treasury Bonds, Bills, and Notes

Treasury bonds, bills, and notes are all marketable securities sold by the United States Treasury and fully backed by the U.S. government. As a marketable security, you have options: you can transfer the security to another person, and you are free to sell the security before it reaches maturity.

Treasury bonds, bills, and notes are sold via an auction process. Weekly auctions take place for 4, 8, 13, 17, and 26-week treasury bills, while treasury notes, bonds, and 52-week treasury bills go on auction monthly.

Treasury bonds

Treasury bonds are a long-term investment option. They take 20-30 years to mature, but you get interest payments every six months. The interest rate is set at the time of auction. Once the bond matures, you will receive a payment that equals the face value of the bond when you purchased it.

Important: A treasury bond is not the same thing as a U.S. savings bond. While a treasury bond is a marketable security, a U.S. savings bond is a non-marketable security.

Learn more about Treasury Bonds here.

Treasury notes

Treasury notes are a medium-term investment option that you can buy in 2, 3, 5, 7, or 10-year terms. They pay out a fixed rate of interest every six months until they reach full maturity. Just like treasury bonds, the interest rate is fixed at the time of auction.

Learn more about Treasury Notes here.

Treasury bills

Treasury bills are designed for short-term investing, maturing in one year or less. You can buy them in 4, 8, 13, 17, 26, and 52-week terms. Sold at what is called “par value” (this is face value) or a discount, you’ll receive the par value of the bond at maturation. The difference between the discounted purchase price and par value of the bond is the “interest” you earn.

Learn more about Treasury Bills here.

Other Marketable Securities

While we won’t cover these securities in this article, there are other marketable securities sold by the U.S. Treasury: Treasury Inflation-Protected Securities (TIPS), Floating Rate Notes (FRNs), and Separate Trading of Registered Interest and Principal of Securities (STRIPS).

Why should you consider investing in Treasury Bonds, Bills, and Notes?

Low risk

Compared to higher-risk securities, like stocks, treasury bonds, bills, and notes have lower returns on investment. However, since these investments are fully backed by the U.S. government, your investment is extremely secure.

This makes treasury bonds, bills, and notes an attractive investment during an unpredictable economy. As part of a diversified portfolio, treasury investments help balance the volatility of other investment types.

Liquidity

A benefit of investing in treasury bonds, bills, and notes is the liquidity. Compared to other high-yield investment options, you have more options if you want to sell before the term ends. Granted, you may receive less than what you initially invested if you sell before your term is up.

Tax benefits

Unlike other high-yield savings options — like CDs, for example — treasury bonds, bills, and notes are only taxable at the federal level, not the state or local level. So while you will pay federal taxes on the interest you’ve earned with your treasury investment, you won’t be taxed at the state or local level.