Government obligations with maturities more than one year, but less than ten years.

Understanding Treasury Notes

Issued in maturities of two, three, five, seven, and 10 years, Treasury notes are popular investments, and there is a large secondary market that adds to their liquidity.

Interest payments on the notes are made every six months until maturity. The income for interest payments is not taxable on a municipal or state level but is federally taxed, similar to a Treasury bond or a Treasury bill.

Treasury notes, bonds, and bills are all types of investments in debt issued by the U.S. Treasury. The key difference between them is their length of maturity. For example, a Treasury bond’s maturity exceeds 10 years and goes up to 30 years, making Treasury bonds the longest-dated, sovereign fixed-income security.

Treasury Notes and Interest Rate Risk

The longer its maturity, the higher a T-note’s exposure to interest rate risks. In addition to credit strength, a note or bond’s value is determined by its sensitivity to changes in interest rates. Most commonly, a change in rates occurs at the absolute level underneath the control of a central bank or within the shape of the yield curve.

Moreover, these fixed-income instruments possess differing levels of sensitivity to changes in rates, which means that the fall in prices occurs at various magnitudes. This sensitivity to shifts in rates is measured by duration and expressed in terms of years. Factors that are used to calculate duration include coupon, yield, present value, final maturity, and call features.

A good example of an absolute shift in interest rates occurred in December 2015, when the Federal Reserve (the Fed) raised the federal funds rate to a range 25 basis points higher. At that time, it had been in the range of 0% to 0.25% but then was changed to 0.25% to 0.50%. This increase in benchmark interest rates has had the effect of decreasing the prices of all outstanding U.S. Treasury notes and bonds.