What is a Treasury Note?
Treasury Notes are securities issued by the United States Treasury with maturities ranging from 2 to 10 years.
A Treasury Note pays a fixed rate of interest every 6 months, based on the yield of the bond at its auction.
An investor buys a Treasury Note at a price above, below or at par (Par is $100 for Treasury Notes). When the note matures, you are paid back its par value.
For more detail on the basics on how a fixed income security like this works – see our article here.
Not to be confused with a Treasury Bill or Treasury Bonds (Or, See our article: What’s the Difference?)
Why Invest in Treasury Notes?
Investors purchase treasury notes for several reasons:
- Portfolio diversification
- Diversification compared to the stock market
Treasury Notes will help protect an investor’s portfolio in times of a stock market downturn.
Consider the chart below, where the blue line represents the performance of an ETF that holds a diversified set of treasury notes and the green line represents the performance of the S&P 500 index. In the worst of the 2008/2009 financial crisis, the stock market has a whole lost more than 40%. But, investors in Treasury Notes were up nearly 20%.
- Diversification of interest rates
An investor who purchases longer term Treasury Bond will get a higher yield, but in exchange the investor must either commit to locking away their money for a longer period of time, or subject their investment to increased interest rate risk.
As I write this, interest rates have been rising. The chart below compares an ETF which invests in treasury notes (3-7 years to maturity, in the blue line below) to an ETF which invests in long term treasury bonds (20+ years to maturity, the green line below).
Notice that as interest rates have risen, investors in long term treasury bonds have taken a 15% hit compared to investors in shorter term treasury notes who have lost about 3%. For this reason, investors may want to keep some bond holdings in shorter term treasury notes to eliminate the risk that rising interest rates pose to fixed income investments.
(See article here: Why do bond prices go down as interest rates rise?)
- Source of income
Treasury Notes provide investors with interest payments every 6 months for investors who are retired or otherwise looking for income from their investments.
At today’s historically low rates, a 10 year Treasury Note has a yield of about 3%. This means for every $10,000 you have invested in 10 year treasury notes today, you will receive $150 every 6 months, or $300 per year.
Where to Buy Treasury Notes
Treasury notes can be purchased at auction on Treasury Direct in increments of $100.
Treasury Notes at auction or on the secondary market may also be available through your broker, ask your broker for more info.
Alternatives to Treasury Notes
Numerous ETFs and Mutual Funds exist that allow investors to invest in Treasury Notes. Most are named “Intermediate Term Government Funds”.
Just some of the ones include:
IEI – iShares 3-7 Year Treasury ETF
SCHR – Charles Schwab Intermediate Term Treasury ETF
VGIT – Vanguard Intermediate Term Treasury ETF
Investors can learn more about Treasury Notes on Treasury Direct’s website, here.
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