Treasury Bills vs. Bonds: What’s the Difference?

Both treasury bonds and treasury bills are crucial components of the U.S. government’s strategy to finance its operations, yet they serve distinct purposes and appeal to different types of investors. Treasury notes, often called T-notes, are medium-term securities with maturities ranging from two to 10 years. They offer a fixed interest rate, paid semi-annually, attracting those who seek a balance between risk and return over a moderate time frame. On the other hand, Treasury bonds, or T-bonds, are long-term investments with maturities extending up to 30 years. 

A financial advisor can help you build a balanced portfolio that includes a smart bond strategy.

Treasury Bills vs. Treasury Bonds

Treasury bills and Treasury bonds are debt instruments issued by the U.S. Department of the Treasury to help fund the operations of the federal government. Backed by the “full faith and credit” of the government, both are extremely low-risk investments. However, that security comes at a cost for investors. The returns offered by “T-bills” and “T-bonds” often fall well short of the returns of stocks and mutual funds.

The key difference between the two is the amount of time it takes for each to mature. Treasury bonds mature after 30-years, making them long-term debt securities. Treasury bills are short-term securities that mature within a year and pay less interest than T-bonds. In fact, the maturity period of T-bills can be as short as four weeks.

The other primary difference between T-bills and T-bonds is how they pay interest. A T-bill pays out interest only when it matures. When an investor purchases a T-bill, they’ll pay a discounted rate and later collect the full face value of the bill when it reaches maturity.  Treasury bonds work differently, paying out interest to investors twice a year until reaching maturity.

But T-bills and T-bonds share a plethora of similarities. You purchase both at auction, either on the TreasuryDirect platform or through a bank or broker. You can buy or sell both on secondary markets. Both have a minimum purchase of $100 and the Treasury sells them in increments of $100.

Treasury Bills vs. Savings Bonds

Another common type of bond is the U.S. savings bond. Like T-bills and T-bonds, the Treasury Deaprtment issues savings bonds to help fund government operations, making them reliable but not lucrative investments. However, unlike T-bills and T-bonds, investors cannot buy or sell savings bonds cannot on secondary markets. You can purchase a savings bond with as little as $25.

The two most common varieties of savings bonds are Series I and Series EE bonds. Interest accrues monthly and compounds semiannually for both kinds of savings bonds. Like T-bills, you collect your interest when the bond matures. While the Treasury sells Series EE bonds at a discount (half face value) that earns interest for 30 years, they double in value after 20 years. Series I bonds also earn interest (fixed interest and inflation-adjusted interest) for 30 years.

Government-Backed Debt Securities

Other Types of Bonds

Not all bonds come from the federal government. Municipal bonds issued by local governments raise money for projects like new roads and schools. They offer a fixed rate of return, with interest paid out every six months like Treasury bonds. However, municipal bonds aren’t as safe as T-bills or T-bonds, since local governments can default and go bankrupt.

Like governments, corporations also look to bonds as a means to raise capital. Corporate bonds can pay out interest at fixed or variable rates, or exclusively on their final maturity date. Unlike the federal government, corporations must work with investment banks or other financial institutions to get their bonds onto primary or secondary markets.

What Are Treasury Notes?

Treasury notes, often referred to as T-notes, help finance the national debt. Investors consider them one of the safest investments available due to the backing of the U.S. government. Treasury notes have maturities ranging from two to ten years, making them a medium-term investment option. They pay interest every six months, providing a steady income stream for investors. The Treasury determines the interest rate, also known as the yield, at auction. The yield reflects the current market conditions and investor demand.

Treasury bills differ significantly from Treasury notes. T-bills have the shortest maturities, ranging from a few days to one year. Unlike notes and bonds, T-bills do not pay periodic interest. Instead, the Treasury sells them at a discount to their face value, and investors receive the full face value at maturity. This means the return on investment is the difference between the purchase price and the amount received at maturity. T-bills are ideal for investors seeking short-term, low-risk investment options. Treasury notes are closer to bonds than they are notes.

How to Buy Treasury Securities

You can add Treasury bills, bonds, or notes to your investment portfolio several different ways. Here’s what you need to know about where to buy, how much you need, and when you can invest.

1. Buy Directly from the U.S. Treasury (TreasuryDirect)

The most straightforward way to purchase Treasury securities is through the U.S. Treasury’s online platform, TreasuryDirect.gov. You can open an account for free and participate in regularly scheduled auctions of T-bills, T-notes, and T-bonds.

• Minimum purchase: $100, in increments of $100.
  
• Auction schedule: Weekly, while notes and bonds typically have monthly auctions.
  
• Settlement: You settle (finalize) your purchase on the issue date, usually within a few business days of the auction.

2. Buy Through a Broker

You can also purchase Treasury securities through a bank, brokerage firm, or financial advisor. This option is convenient if you already have a brokerage account and prefer to keep all your investments in one place.

• Brokers may charge a small fee or commission for their service.
  
• You can also access Treasury securities on the secondary market through brokers, buying them from other investors after the original auction.

3. Buy on the Secondary Market

If you miss an auction or want to purchase a Treasury security with a specific maturity or yield, you can buy existing (previously issued) securities on the secondary market.

• Secondary market prices fluctuate based on supply, demand, and prevailing interest rates.
  
• Settlement typically occurs one or two business days after purchase.

No matter which route you choose, Treasury securities remain one of the safest investments you can make, backed by the full faith and credit of the U.S. government. Always check current rates and terms before purchasing to ensure they fit your financial goals and timeline.

How Interest Rate Changes Affect Treasury Bills and Bonds

Interest rates and bond prices move in opposite directions. When rates rise, the market value of existing bonds falls. When rates fall, existing bond prices rise. Any fixed-income investor needs to understand this relationship before putting money into Treasury securities.

The reason comes down to competition. If you own a Treasury bond paying 3% interest and new bonds pay 4%, your bond becomes less attractive to other investors. To sell it on the secondary market, you would have to accept a lower price that effectively brings the yield up to match what new buyers can get elsewhere. The reverse happens when rates fall: your 3% bond becomes more valuable because new bonds are paying less.

Maturity length determines how sensitive a bond is to rate changes. Analysts measure this sensitivity with a concept called duration. The longer the maturity, the more a bond’s price moves in response to a given change in rates. A 30-year Treasury bond is far more sensitive to rate movements than a one-year Treasury bill. A 1% rise in interest rates might reduce the market value of a 30-year bond by 15% to 20%. Meanwhile, this has little affect on a short-term T-bill held to maturity because the investor gets their money back so quickly.

Yields and Maturity

This is why the choice between T-bills and T-bonds is not just about yield. An investor who needs to sell a 30-year T-bond before maturity risks losses due to rising interest rates. An investor who holds T-bills, by contrast, simply rolls them over at each maturity date, capturing whatever rate the market offers at that point. In a rising rate environment, that flexibility is valuable. In a falling rate environment, a locked-in long-term bond looks attractive in hindsight.

Treasury notes, which mature in two to ten years, sit between these two extremes in terms of rate sensitivity. They offer more yield than T-bills in most rate environments while carrying less price risk than 30-year bonds, which is why they are a common choice for investors who want some term premium without taking on the full duration risk of a long bond.

For investors who hold Treasury securities to maturity rather than selling on the secondary market, the price fluctuations along the way are largely irrelevant. The face value is guaranteed at maturity regardless of what rates do in the interim. The risk only materializes if you need to sell before the security matures, which is why matching the maturity of a Treasury purchase to your actual time horizon matters more than chasing the highest available yield.

How Treasury Securities Are Taxed

Treasury securities carry a tax advantage that is easy to overlook when comparing yields across different types of fixed-income investments. The IRS taxes interest earned on Treasury bills, notes and bonds in the same year you receive it. For T-bills, that means the IRS will tax the discount you earn when the bill matures. For T-notes and T-bonds, the semiannual interest payments act as ordinary income for that year’s taxes.

What sets Treasury securities apart is that their interest is exempt from state and local income taxes. This distinction matters most for investors in high-tax states. A Treasury bond yielding 4% produces a higher after-tax return for a New York or California resident than a corporate bond yielding the same 4%, because the corporate bond interest is fully taxable at both the federal and state level while the Treasury interest escapes state tax entirely.

The tax-equivalent yield calculation makes this comparison concrete. For an investor in a state with a 6% income tax rate, a 4% Treasury yield is equivalent to a taxable yield of approximately 4.26% (4% / (1 – 0.06) = 4.26%). The gap widens as the state tax rate rises, making Treasuries progressively more attractive relative to taxable alternatives for investors in high-tax states.

Savings Bonds

Savings bonds follow different rules. Interest on Series EE and Series I bonds accrues over the life of the bond but does not face federal tax until an investor redeems the bond or it reaches final maturity. That deferral can be valuable for investors who expect to be in a lower tax bracket when they redeem, such as in retirement. Both series are also exempt from state and local income tax, consistent with other Treasury securities.

An additional exclusion applies when savings bond proceeds pay for qualified higher education expenses. If the bondholder meets income requirements in the year of redemption, the interest may be partially or fully excluded from federal taxable income. The exclusion phases out at higher income levels, and the bonds must be registered in the name of someone who is at least 24 years old when purchased, but for families planning ahead for education costs the tax benefit can be meaningful.

One timing consideration for T-bill investors involves how you report the discount at tax time. When a T-bill matures, the difference between the purchase price and the face value received becomes interest income on a 1099-INT, not a capital gain. Investors who are accustomed to treating short-term price appreciation as capital gains should be aware that T-bill returns do not receive that treatment regardless of how long the bill was held.

Bottom Line

Treasury bills are short-term debt securities issued by the federal government that mature within a year of purchase. Bonds, on the other hand, come in several variations and typically come with much longer maturity periods. Fixed-income securities issued by the federal government are viewed as ultra-safe investments, but they won’t produce significant returns. Investors can also purchase bonds issued by municipal governments and corporate entities.

Asset Allocation Tips

• A financial advisor can also help you spread your assets across various investment classes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• The Rule of 110 is a rule of thumb that can help direct how much of your retirement savings is allocated to equities versus bonds. Simply subtract your age from 110 to determine the percentage of your portfolio that should be allocated to equities, with the remaining portion invested in bonds. For instance, a 50-year-old following this rule would have a 60-40 split between stocks and bonds.
• Need more help determining the right asset allocation? Give SmartAsset’s free asset allocation calculator a try. This will tell you how much of your portfolio should be allocated to various investments. This is determined by looking at your risk tolerance.

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