Understanding Treasury Notes: Terms, Investment Options, and Benefits
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
A Treasury note is a U.S. government debt security that pays a fixed interest rate every six months and matures in two to 10 years, repaying face value at maturity.
Key takeaways
- A noncompetitive bid guarantees you get the note at whatever yield the auction sets.
- A note trades below par when its yield exceeds the coupon and above par when the yield is lower.
- A note with a duration of 4.5 would lose about 4.5% of its value if its yield rose one percentage point.
- Interest is taxed federally but exempt from state and local income taxes.
A Treasury note (T-note) is a marketable debt security issued by the U.S. Department of the Treasury that pays a fixed rate of interest every six months and matures in two to 10 years. Buying one is a loan to the federal government, repaid at face value at maturity. Treasury notes sit between Treasury bills, which mature in a year or less, and Treasury bonds, which run longer than 10 years.
How Treasury notes work
Each note carries a coupon rate set at auction, a face value (also called par) and a maturity date. The coupon rate times the face value gives the annual interest, which is split into two equal semiannual payments. At maturity the Treasury repays the face value, and the interest stops.
The price you pay can differ from face value. If the yield set at auction or in the market is higher than the coupon, the note trades below par (at a discount). If the yield is lower than the coupon, it trades above par (at a premium). Your actual return over the life of the note depends on that purchase price. Yield to maturity captures this by combining the coupon and the gain or loss to par in a single annual rate.
Buying at auction or on the secondary market
New notes are sold at regularly scheduled auctions. A noncompetitive bid guarantees you receive the note and accepts whatever yield the auction sets. A competitive bid names the yield the bidder is willing to accept. It may be filled in full, in part or not at all. Individuals can bid noncompetitively through TreasuryDirect, the Treasury’s own platform, or through a bank or broker.
Notes already issued trade on the secondary market through brokers. This market is deep, so investors can usually sell a note before maturity instead of holding it for years. The sale price is set by current market yields, not by what you originally paid. Investors can also hold Treasury notes indirectly through bond funds or an ETF that tracks a range of Treasury maturities.
Example of a Treasury note
Hypothetical example, for illustration only. An investor buys $10,000 face value of a newly issued 5-year note with a 4% coupon at par.
- Annual interest: $10,000 × 4% = $400
- Each semiannual payment: $400 ÷ 2 = $200
- Number of payments: 5 years × 2 = 10
- Total interest over the life of the note: $2,000
- At maturity: the $10,000 face value is repaid
Held to maturity, these cash flows do not change with interest rates. The figures assume purchase at par and ignore taxes and any reinvestment of the $200 payments.
Interest rate risk and duration
When market yields rise, existing notes with lower fixed coupons become less attractive, so their prices fall. When yields fall, prices rise. A 10-year note has more interest rate risk than a 2-year note because its fixed payments extend further into the future.
This sensitivity is measured by duration, expressed in years. As a rough rule, a price changes by about the duration multiplied by the change in yield. Hypothetically, a note with a duration of 4.5 would lose about 4.5% of its market value if its yield rose by one percentage point.
For example, in December 2015 the Federal Reserve raised the target range for the federal funds rate by 25 basis points, from 0% to 0.25% to 0.25% to 0.50%. Higher benchmark rates push down the prices of outstanding Treasury notes and bonds.
Yield curve risk
Rates do not always move by the same amount across maturities. Changing investor expectations can reshape the yield curve, and this is called yield curve risk.
- Steepening: long-term yields rise more than short-term yields, so the spread between them widens. Prices of longer notes fall relative to shorter ones.
- Flattening: the spread narrows. Prices of shorter notes fall relative to longer ones.
- Inversion: short-term yields rise above longer-term yields, producing an inverted yield curve.
Tax treatment
Interest on Treasury notes is taxable at the federal level and exempt from state and local income taxes. For investors in high-tax states, that exemption can make a note’s after-tax return compare favorably with a fully taxable bond or deposit offering a similar quoted rate.
Treasury notes vs. other Treasury securities
| Security | Maturity | Interest |
|---|---|---|
| Treasury bills | One year or less | Sold at a discount, no coupon |
| Treasury notes | 2, 3, 5, 7, 10 years | Fixed coupon, paid semiannually |
| Treasury bonds | Longer than 10 years (currently 20 and 30) | Fixed coupon, paid semiannually |
| TIPS | Multiple terms | Principal adjusts with inflation |
| Floating rate notes | 2 years | Rate resets with T-bill yields |
Maturity is the main difference among bills, notes and bonds, and it drives interest rate sensitivity. Standard notes pay a fixed nominal coupon, unlike TIPS, whose principal is indexed to inflation.
Limitations
- Inflation risk: fixed payments lose purchasing power if inflation runs above the coupon, and U.S. inflation rates by year have varied widely.
- Price risk before maturity: selling after rates have risen can mean a loss of principal, even though repayment at maturity is backed by the U.S. government.
- Opportunity cost: locking in a rate for up to 10 years means missing higher yields if rates climb.
FAQs
What are 2-year Treasury note futures?
They are exchange-traded futures contracts based on 2-year Treasury notes. Traders and institutions use them to hedge or speculate on short-term interest rates without buying the notes outright. A futures position carries leverage and margin requirements, so its risk is different from simply holding a note to maturity.
The Bottom Line
Treasury notes suit investors who want fixed semiannual income from the U.S. government over two to 10 years. Holding a note to maturity locks in its cash flows, while selling early exposes you to price swings when rates change. Investors in high-tax states may gain from the state and local tax exemption, but they should weigh inflation risk and the cost of missing higher future yields.
