Treasury Note (T-Note)
How Treasury Notes Work
Treasury notes sit in the middle of the maturity spectrum — longer than T-bills (under 1 year) and shorter than T-bonds (20-30 years). This makes them the most widely issued and actively traded Treasury security.
The mechanics are straightforward. The Treasury auctions notes on a regular schedule. You buy at or near par value ($100 minimum), receive semiannual coupon payments at a fixed rate, and get your principal back at maturity. After issuance, T-notes trade freely on the secondary market.
| Maturity | Auction Frequency | Typical Use |
|---|---|---|
| 2-year | Monthly | Short-term rate expectations, Fed policy gauge |
| 3-year | Monthly | Bridge between short and intermediate term |
| 5-year | Monthly | Intermediate-term portfolio allocation |
| 7-year | Monthly | Intermediate exposure with moderate duration |
| 10-year | Quarterly (with reopenings) | Benchmark rate for the entire economy |
The 10-Year Treasury Note — Why It Matters
The 10-year T-note is the single most important benchmark in fixed-income markets. Its yield drives pricing across a huge swath of the economy:
Mortgage rates: The 30-year fixed mortgage rate is closely tied to the 10-year Treasury yield. When the 10-year rises, mortgage rates typically follow.
Corporate borrowing: Companies price their corporate bonds as a spread above the 10-year Treasury. A rising 10-year yield increases borrowing costs across the board.
Yield curve benchmark: The spread between the 2-year and 10-year T-note yields (the “2s10s”) is the most watched yield curve indicator. When it inverts — the 2-year yielding more than the 10-year — it signals that the market expects economic weakness ahead. This inverted yield curve has preceded every U.S. recession in modern history.
Valuation models: The 10-year yield feeds into discount rates for equity valuation, WACC calculations, and pension fund liability estimates.
Treasury Note Yields
Two yield measures to know:
Coupon rate: The fixed annual interest rate set at auction. A 5-year T-note with a 4.00% coupon on $10,000 face value pays $400 per year ($200 every six months).
Yield to maturity (YTM): The total annualized return if you buy at the current market price and hold until maturity. If the note trades below par, YTM exceeds the coupon. If above par, YTM is lower.
T-note yields reflect market expectations for Federal Reserve policy, inflation, and economic growth. The 2-year note is especially sensitive to near-term Fed rate expectations, while the 10-year reflects longer-term inflation and growth forecasts.
T-Notes vs. Other Treasury Securities
| Feature | T-Note | T-Bill / T-Bond |
|---|---|---|
| Maturity | 2, 3, 5, 7, or 10 years | Bills: 4-52 weeks. Bonds: 20-30 years. |
| Interest Payment | Semiannual fixed coupon | Bills: none (discount). Bonds: semiannual coupon. |
| Duration | Moderate (roughly 1.8-8.5 years) | Bills: very low. Bonds: high (~15-20 years). |
| Interest Rate Risk | Moderate | Bills: minimal. Bonds: significant. |
| Yield (typical) | Middle of the curve | Bills: lower (short term). Bonds: higher (long term) in a normal curve. |
| Liquidity | Extremely high — especially the 10-year | High for both, but 10-year T-note is the most liquid bond in the world. |
Risks of Treasury Notes
Interest rate risk: The primary concern. A 10-year T-note with a duration of ~8 years would lose roughly 8% of its market value if interest rates rose by 1 percentage point. Shorter maturities (2-year, 3-year) have less exposure.
Reinvestment risk: When your T-note matures, prevailing rates may be lower, forcing you to reinvest at a reduced yield. This was a real issue for investors rolling 5-year notes during the 2010s low-rate environment.
Inflation risk: Fixed coupons lose purchasing power when inflation runs above the coupon rate. TIPS (Treasury Inflation-Protected Securities) address this, but standard T-notes don’t.
No credit risk: The U.S. government has never defaulted on its debt. T-notes carry the same sovereign credit backing as all Treasury securities.
Tax Treatment
Interest income from Treasury notes is taxed as ordinary income at the federal level but is exempt from state and local income taxes. This is the same treatment as T-bills and T-bonds, and it gives Treasuries a tax edge over corporate bonds for investors in high-tax states.
Capital gains or losses from selling T-notes before maturity are taxed under standard capital gains rules.
How to Buy Treasury Notes
TreasuryDirect.gov: Buy at auction with a noncompetitive bid. $100 minimum, no fees. The simplest route for buy-and-hold investors.
Brokerage account: Buy at auction or on the secondary market. Most brokers offer Treasury purchases with no commission. This gives you the flexibility to trade before maturity or build a bond ladder across multiple maturities.
Treasury ETFs and mutual funds: Intermediate-term Treasury funds typically hold a mix of T-notes across maturities. They offer instant diversification and daily liquidity, though you’ll pay an expense ratio. Check the fund’s effective duration to understand its interest rate sensitivity.
Key Takeaways
- Treasury notes are medium-term U.S. government securities (2 to 10 years) paying a fixed semiannual coupon.
- The 10-year T-note is the most important benchmark in fixed income — it drives mortgage rates, corporate borrowing costs, and equity valuations.
- The 2-year/10-year spread is the market’s primary yield curve signal for economic health.
- T-notes offer moderate duration, sitting between the near-zero interest rate risk of T-bills and the high sensitivity of T-bonds.
- Interest is federally taxable but exempt from state and local taxes.
- Buy through TreasuryDirect, a brokerage, or intermediate-term Treasury ETFs.
Frequently Asked Questions
What is the difference between a Treasury note and a Treasury bond?
Maturity is the key difference. Treasury bonds mature in 20 or 30 years, while Treasury notes mature in 2 to 10 years. Both pay semiannual coupons and carry the same credit quality. T-bonds have higher duration and therefore more price volatility when interest rates change.
Why is the 10-year Treasury yield so important?
The 10-year yield is the primary benchmark for long-term borrowing costs in the U.S. economy. Mortgage rates, corporate bond pricing, and equity discount rates all reference it. It also anchors the yield curve, which signals market expectations about future growth and Fed policy.
Are Treasury notes a safe investment?
From a credit perspective, yes — they carry the full backing of the U.S. government. However, they’re not immune to losses. If you sell before maturity and rates have risen, the market price will be below par. A 10-year note has meaningful interest rate risk compared to shorter-term alternatives.
How do 2-year and 10-year Treasury yields differ?
The 2-year yield reflects near-term expectations for Federal Reserve policy — it moves tightly with the fed funds rate. The 10-year yield reflects longer-term expectations for growth and inflation. The spread between them (the “2s10s”) is the most closely watched recession indicator in finance.
Can I sell a Treasury note before maturity?
Yes. T-notes trade on the secondary market and are among the most liquid securities in the world — especially the 10-year. You can sell through any brokerage at the prevailing market price, which may be above or below what you paid depending on how interest rates have moved.