U.S. Treasury Note

A U.S. Treasury Note (often called a T-Note) is a type of debt security issued by the U.S. Treasury to fund government spending. Think of it as an IOU from the U.S. Federal Government. When you buy a T-Note, you are lending money to the government for a set period. In return, the government promises to pay you regular interest payments, known as coupon payments, twice a year. T-Notes are considered medium-term investments, with a maturity (the length of the loan) ranging from two to ten years. At the end of this term, the government repays the full original loan amount, called the principal or par value. Because they are backed by the full faith and credit of the United States, T-Notes are considered one of the safest investments on the planet. This high level of safety makes them a cornerstone of the global financial system and a benchmark for pricing other, riskier assets.

The mechanics of a T-Note are refreshingly simple, which is a big part of their appeal.

• Buying Them: T-Notes are typically sold to the public through auctions conducted by the Treasury Department. Investors can buy them directly from the government via the TreasuryDirect website or through a bank or broker.
• Earning Interest: Once you own a T-Note, you'll receive a fixed interest payment every six months until it matures. For example, if you own a $1,000 T-Note with a 3% coupon rate, you’ll receive $15 every six months ($1,000 x 3% / 2). This predictable cash flow is what makes them a popular fixed-income investment.
• Getting Your Money Back: When the note “matures” at the end of its term (say, 10 years), the government pays you back the full face value of the note—in our example, $1,000.
• Selling Early: You don't have to wait until maturity. T-Notes are highly liquid, meaning they can be easily bought and sold on the secondary market through a broker, much like stocks. However, their price on this market can fluctuate. If prevailing interest rates have risen since you bought your note, your older, lower-paying note will be less attractive and will sell for a lower price. Conversely, if rates have fallen, your note becomes more valuable.

The Treasury issues a few different types of debt, and it's easy to get them mixed up. The main difference is their lifespan.

The key distinction here is time and interest. U.S. Treasury Bills (T-Bills) are the sprinters of the Treasury world, with maturities of one year or less. Unlike T-Notes, they don't pay a periodic coupon. Instead, they are sold at a discount to their face value. You might buy a $1,000 T-Bill for $980, and when it matures in six months, you get the full $1,000 back. Your “interest” is the $20 difference.

U.S. Treasury Bonds (T-Bonds) are the marathon runners, with maturities longer than ten years, often stretching out to 20 or 30 years. Like T-Notes, they pay interest twice a year. The primary difference is their longer duration, which makes them more sensitive to changes in interest rates. This increased interest rate risk means their price on the secondary market can swing more dramatically than a T-Note's price.

For a value investor, T-Notes are more than just a safe place to park cash; they are a fundamental tool for making decisions.

Value investing legends like Benjamin Graham championed the concept of a margin of safety. T-Notes are the ultimate expression of this—your principal and interest are about as guaranteed as anything can be. The yield on a T-Note, particularly the 10-year note, is famously used as the “risk-free rate of return.” It sets the baseline. A value investor asks: “Why should I take the risk of investing in a company if I don't expect it to generate returns that comfortably beat what I can get from the U.S. government, risk-free?” If a stock's potential return isn't high enough to compensate for its inherent risks relative to a T-Note, a value investor will simply pass.

Even the safest investments have a catch. With T-Notes, the primary villain is inflation risk. The fixed coupon payments are set in stone. If inflation suddenly spikes to 5%, and your T-Note is only paying you 3%, your money is actually losing purchasing power every year. You're getting your money back, but it buys less than it used to. This is why holding very long-term bonds can be risky—it locks you into an interest rate that may be dwarfed by future inflation. While T-Notes provide unparalleled safety of principal, they don't guarantee a positive real return after accounting for inflation.