Treasury Bills, Notes, and Bonds: How to Buy Government Debt Directly

When the U.S. government needs to borrow money, it issues Treasury securities — debt instruments backed by the full faith and credit of the federal government. For practical purposes, they are the safest investment available: the government has never defaulted on its debt obligations, and these securities are the global benchmark for a 'risk-free' rate of return. Individual investors can buy them directly at TreasuryDirect.gov without paying any brokerage commissions or markups, making them one of the most cost-efficient fixed-income investments available.

Three main types exist, distinguished by maturity: Treasury bills (T-bills) mature in 4, 8, 13, 17, 26, or 52 weeks. Treasury notes (T-notes) mature in 2, 3, 5, 7, or 10 years. Treasury bonds (T-bonds) mature in 20 or 30 years. All three pay interest exempt from state and local income taxes — a meaningful advantage over corporate bonds and CDs for investors in high-tax states.

How T-bills work — discount pricing and effective yield

T-bills don't pay periodic interest. Instead, they're sold at a discount to face value and redeemed at par. If a 26-week T-bill with a $1,000 face value is auctioned for $975, the $25 difference is your return — effectively a 5.1% annualized yield on your $975 investment. You receive the full $1,000 at maturity. The stated discount rate and the investment yield are slightly different numbers; the investment yield (what you actually earn on dollars deployed) is the relevant figure for comparison with other instruments.

T-notes and T-bonds pay a fixed coupon rate semiannually for the life of the security, then return the face value at maturity. A $10,000 10-year T-note at 4.5% pays $225 every six months and $10,000 at maturity. If you buy at auction (par), your yield exactly equals the coupon rate. If you buy on the secondary market at a price above or below par, your yield to maturity diverges from the coupon — which is why secondary-market bond prices and yields move inversely.

TreasuryDirect vs. brokerage — practical differences

TreasuryDirect.gov allows you to buy Treasuries directly at auction with no fees, in minimum increments of $100. The interface is dated and clunky, but the economics are as good as it gets — no spread, no commission, no fund expense ratio. The limitation: selling before maturity is cumbersome. TreasuryDirect requires a transfer to a brokerage before you can sell on the secondary market, which takes several business days. TreasuryDirect is best for buy-and-hold investors who plan to hold to maturity.

Buying through a brokerage (Fidelity, Schwab, Vanguard) is more convenient: you can purchase newly issued Treasuries at auction through the brokerage with no fee, hold them alongside other investments, and sell them on the secondary market instantly if needed. The trade-off is a small bid-ask spread on secondary-market transactions. For most investors, the brokerage route offers sufficient convenience with minimal cost disadvantage. Treasury ETFs — like iShares' SHY (short-term), IEF (intermediate), or TLT (long-term) — provide diversified exposure but add an expense ratio and introduce market price volatility that individual held-to-maturity Treasuries avoid.

Duration risk — why longer-term bonds are riskier than they look

A T-bill you hold to maturity returns exactly your money plus the known yield — essentially no risk. A 30-year T-bond held to maturity does the same. But if you need to sell before maturity, bond prices move inversely with interest rates. When rates rise by 1%, a 30-year bond's market value falls by approximately 17% to 20% (depending on coupon rate) while a 2-year note falls only about 2%. This sensitivity — called duration — means long-term Treasuries carry substantial price risk if sold before maturity, despite having no credit risk.

The 2022 bond market demonstrated this vividly: TLT (the 20+ year Treasury ETF) fell nearly 35% as the Federal Reserve raised rates aggressively, despite holding only U.S. government obligations. Investors who bought 30-year T-bonds in 2020 at near-zero yields and sold in 2022 took significant losses. The lesson: matching the maturity of a Treasury to your time horizon eliminates duration risk. Buy a 6-month T-bill if you need the money in 6 months; buy a 10-year T-note if you want predictable income for a decade and don't need the principal sooner.