Why U.S. Treasuries Are the Benchmark
U.S. Treasury securities are debt obligations issued by the federal government to finance its operations. Because they're backed by the full faith and credit of the United States government, they carry virtually no default risk and are widely considered the safest investments in the world.
Beyond individual investors, Treasuries serve as the benchmark against which all other bonds are priced. The 10-year Treasury yield, in particular, is one of the most influential numbers in global finance — influencing mortgage rates, corporate borrowing costs, and equity valuations.
The Main Types of U.S. Treasury Securities
Treasury Bills (T-Bills)
T-bills are short-term securities with maturities of 4, 8, 13, 17, 26, or 52 weeks. They don't pay regular coupons — instead, they're sold at a discount to face value and mature at full face value. The difference is your return. T-bills are popular for cash management and as a near-equivalent to money market funds.
Treasury Notes (T-Notes)
T-notes have maturities of 2, 3, 5, 7, or 10 years and pay a fixed coupon semi-annually. The 10-year T-note is the most closely watched and traded U.S. government security globally.
Treasury Bonds (T-Bonds)
T-bonds have the longest maturities — 20 or 30 years — and pay semi-annual coupons. They offer higher yields than shorter-term securities in most environments, but are more sensitive to interest rate changes.
Treasury Inflation-Protected Securities (TIPS)
TIPS are designed to protect investors from inflation. The principal value adjusts with changes in the Consumer Price Index (CPI). Coupon payments, applied to the adjusted principal, rise with inflation and fall with deflation. TIPS are available in 5, 10, and 30-year maturities.
Series I Savings Bonds (I Bonds)
I Bonds are non-marketable savings bonds that combine a fixed rate with a semi-annual inflation adjustment. They must be held for at least one year, and cashing them in within five years forfeits three months of interest. Purchase limits apply per person per year.
Comparing Treasury Securities
| Security | Maturity | Coupon | Inflation Protection |
|---|---|---|---|
| T-Bill | 4–52 weeks | None (discount) | No |
| T-Note | 2–10 years | Fixed, semi-annual | No |
| T-Bond | 20–30 years | Fixed, semi-annual | No |
| TIPS | 5, 10, 30 years | Fixed on adjusted principal | Yes (CPI-linked) |
| I Bond | Up to 30 years | Fixed + inflation rate | Yes |
Tax Treatment of Treasury Securities
Interest earned on Treasury securities is subject to federal income tax but is exempt from state and local taxes. This can be a meaningful advantage for investors in high-tax states. TIPS have an additional complexity: the inflation adjustment to principal is taxable in the year it occurs, even though you don't receive that money until maturity — making TIPS more tax-efficient in tax-advantaged accounts like IRAs.
How to Buy Treasury Securities
There are two primary ways to purchase Treasuries:
- TreasuryDirect.gov: The U.S. Treasury's official platform allows individuals to buy T-bills, notes, bonds, TIPS, and savings bonds directly — fee-free. Ideal for buy-and-hold investors.
- Brokerage accounts: Most major brokerages allow you to purchase Treasuries in the secondary market or at auction. This route offers easier portfolio management and visibility alongside other investments.
Role of Treasuries in a Portfolio
Even for growth-oriented investors, Treasuries serve a valuable function: they tend to appreciate during equity market sell-offs, providing a counterbalancing effect. Holding a portion of your portfolio in Treasuries can reduce overall volatility without dramatically sacrificing long-term returns.