U.S. bonds are debt securities issued by the federal government. When you buy one, you’re lending money to the U.S. Treasury in exchange for regular interest payments and the return of your principal at a set date in the future. They’re backed by the full faith and credit of the U.S. government, making them among the safest investments available anywhere.
The term “U.S. bonds” is used loosely to describe the full family of Treasury securities, which includes bills, notes, bonds, and savings bonds. Each works a little differently, and understanding the distinctions helps you pick the right one for your goals.
How Treasury Securities Work
Every Treasury security has a face value (also called par value), which is the amount the government promises to pay you when the security matures. The minimum purchase is $100, and you can buy in $100 increments. When you buy a Treasury note or bond, the interest rate is locked in at auction and stays fixed for the life of the security. You earn interest on the par value at that set rate, paid out every six months, until the security matures and you get your principal back.
The price you actually pay can be more or less than face value depending on market conditions at the time of purchase. If you buy at a discount, your effective return is slightly higher than the stated interest rate. If you buy at a premium, it’s slightly lower. But no matter what you paid, the government pays back the face value at maturity.
Types of Treasury Securities
The U.S. Treasury issues several types of marketable securities, each defined mainly by how long until it matures.
Treasury Bills
T-bills are short-term securities with five term options, from 4 weeks up to 52 weeks. They don’t pay periodic interest the way notes and bonds do. Instead, you buy them at a discount from face value and receive the full face value when they mature. The difference between what you paid and what you receive is your return. If you bought a $1,000 T-bill for $975, you’d earn $25 over the term. T-bills are popular for parking cash you’ll need relatively soon.
Treasury Notes
T-notes are medium-term securities issued with maturities of 2, 3, 5, 7, and 10 years. They pay interest every six months at a fixed rate. The 10-year Treasury note is one of the most closely watched benchmarks in finance because mortgage rates, corporate borrowing costs, and other interest rates are often tied to its yield.
Treasury Bonds
T-bonds are the longest-term option, now offered in 20-year and 30-year terms. Like notes, they pay interest every six months. Because you’re locking up your money for decades, bonds typically offer a higher interest rate than shorter-term securities, though that’s not always the case. If you’re looking for a steady, predictable income stream over a long period, T-bonds fit that role.
TIPS
Treasury Inflation-Protected Securities, or TIPS, are designed to protect your purchasing power. They mature in 5, 10, or 30 years and pay interest every six months, but here’s the key difference: the principal adjusts up or down based on changes in the Consumer Price Index (CPI-U). When inflation rises, your principal increases, and since interest is calculated on the adjusted principal, your payments grow too. If prices fall, the principal decreases, but at maturity the government pays you either the adjusted principal or the original face value, whichever is greater.
Floating Rate Notes
FRNs are relatively short-term investments that mature in two years. Unlike other Treasury securities with fixed interest rates, FRN rates adjust periodically based on the most recent 13-week T-bill auction. This means your interest payments rise and fall with short-term rates, which can be appealing when rates are climbing.
Savings Bonds
Savings bonds are a separate category from the marketable securities above. You can’t trade them on the open market, and they’re designed for individual savers rather than institutional investors.
Series I savings bonds are the most popular type. They earn a composite rate made up of two parts: a fixed rate that stays the same for the life of the bond, and an inflation rate based on CPI-U changes that resets every six months (announced each May and November). This structure gives you a baseline return plus inflation protection. Series EE bonds, the other current option, earn a fixed rate and are guaranteed to double in value if held for 20 years.
Savings bonds have some restrictions worth knowing. You must hold them for at least one year before cashing them. If you redeem within five years, you forfeit the last three months of interest as a penalty. These aren’t designed for short-term trading; they reward patience.
How to Buy U.S. Bonds
You have two main options for purchasing Treasury securities: through TreasuryDirect or through a bank, broker, or dealer.
TreasuryDirect is the government’s own platform. You set up a free account, link a bank account, and buy directly at auction. All purchases through TreasuryDirect are non-competitive bids, meaning you accept whatever rate the auction determines. You can buy up to $10 million per auction this way. One thing to note: new marketable securities purchased through TreasuryDirect must be held for at least 45 calendar days before you can transfer or sell them, unless the purchase was made with proceeds from a maturing reinvestment.
Buying through a brokerage account gives you more flexibility. You can place competitive bids, where you specify the yield you’re willing to accept (with the risk that your bid might not be filled if the rate comes in lower). You can also buy and sell previously issued Treasury securities on the secondary market at any time, which is useful if you need liquidity before maturity. Most major brokerages charge no commission on Treasury purchases at auction, though policies vary.
Savings bonds can only be purchased through TreasuryDirect, not through a broker. The annual purchase limit for electronic savings bonds is $10,000 per person, per series.
Tax Treatment
Interest earned on all U.S. Treasury securities, including savings bonds, is subject to federal income tax but exempt from state and local income tax. This state tax exemption can be a meaningful advantage if you live in a state with high income tax rates. For example, if you’re comparing a Treasury yielding 4.5% to a corporate bond yielding 4.8%, the Treasury might actually put more money in your pocket after state taxes.
With savings bonds, you have a choice about when to pay federal tax on the interest. You can report it each year as it accrues, or you can defer it and pay all at once when you redeem the bond or it reaches final maturity. Most people choose to defer. Savings bond interest may also be entirely tax-free if you use the proceeds to pay for qualified higher education expenses and meet income eligibility requirements.
Why Investors Buy U.S. Bonds
The primary appeal is safety. U.S. Treasury securities carry virtually no credit risk because they’re backed by the federal government’s ability to tax and print currency. That makes them a cornerstone of conservative portfolios and a common choice for money you can’t afford to lose.
Beyond safety, they serve as a stabilizer. When stock markets drop sharply, investors tend to move money into Treasuries, which often pushes their prices up. Holding some portion of your portfolio in Treasuries can smooth out the volatility of an otherwise stock-heavy mix.
The tradeoff is that returns on Treasuries are generally lower than what you’d expect from stocks or corporate bonds over long periods. You’re trading growth potential for predictability. For retirees drawing income, for emergency reserves, or for goals with a specific timeline, that tradeoff often makes sense.