Treasury bills and bonds are the simplest way to lend money to the U.S. government and earn a may provide return

When you buy a Treasury bill or bond, you are lending money to the federal government. In return, the government pays you interest and returns your principal on a set date. Unlike stocks or mutual funds, there is no market risk — the U.S. government has never defaulted on its debt. The interest rate is fixed when you buy, so you know exactly what you will earn. This makes Treasuries useful for money you need to keep safe while earning more than a savings account offers.

You can buy Treasuries directly from the U.S. Department of the Treasury through TreasuryDirect, a free online platform. You can also buy them through a bank or brokerage account, though you may pay a small fee. The minimum purchase is $100 for most Treasuries, and you can buy in increments of $100 after that. Treasuries are sold at auction on a regular schedule, and you can hold them until maturity or sell them before maturity on the secondary market.

Key Takeaways

  • Treasury bills mature in one year or less, Treasury notes in two to ten years, and Treasury bonds in 20 or 30 years — choose based on when you need the money.
  • You can buy Treasuries directly from TreasuryDirect with no fees or minimum account balance, or through a bank or brokerage for convenience.
  • Interest rates on Treasuries are set at auction and change weekly or monthly depending on the type — rates are higher for longer maturities.
  • If you sell a Treasury before maturity, its price fluctuates based on interest rate changes, so you may get more or less than you paid.
  • Treasuries are backed by the U.S. government and carry no credit risk, making them one of the safest investments available.

The three main types of Treasuries and how long your money is locked in

Treasury bills (T-bills) mature in four weeks, 13 weeks, 26 weeks, or one year. They are sold at a discount — you pay less than the face value and receive the full face value at maturity. For example, you might pay $9,800 for a $10,000 bill maturing in 26 weeks, earning $200 in interest. T-bills are best for money you know you will need within a year.

Treasury notes (T-notes) mature in two, three, five, seven, or ten years. You pay the full face value upfront and receive interest payments every six months. If you buy a $10,000 note at 5% annual interest, you receive $250 every six months for the life of the note, then get your $10,000 back at maturity. T-notes are useful for medium-term goals like saving for a down payment or funding a project in five to ten years.

Treasury bonds (T-bonds) mature in 20 or 30 years. Like notes, you pay full face value and receive interest every six months. Bonds pay higher interest rates than bills or notes because you are locking in your money for decades. They are best for long-term wealth building when you will not need the money for many years.

How to open an account and make your first purchase on TreasuryDirect

Go to TreasuryDirect.gov and create an account. You will need a Social Security number, email address, and a U.S. bank account for deposits and withdrawals. The account takes about 15 minutes to set up and has no fees or minimum balance. Once your account is open, you can fund it by linking your bank account.

Treasuries are sold at auction on a set schedule. T-bills auction weekly on Mondays, T-notes and T-bonds auction on specific dates announced in advance. You place a bid before the auction closes, either a competitive bid (you specify the yield you want) or a non-competitive bid (you accept whatever rate the auction sets). Most individual investors use non-competitive bids because the rate is may provide and you do not have to guess what the market will pay.

After the auction closes, the Treasury settles your purchase within one to two business days. Your money is deducted from your bank account and your securities appear in your TreasuryDirect account. You can view your holdings, interest payments, and maturity dates anytime online. When your Treasury matures, the principal and any final interest payment are deposited directly into your bank account.

Buying Treasuries through a bank or brokerage instead of TreasuryDirect

Banks and brokerages like Fidelity, Vanguard, Charles Schwab, and E-Trade all allow you to buy Treasuries. The process is simpler than TreasuryDirect — you log into your existing account and place an order like you would for a stock. Some brokerages charge a small transaction fee ($1 to $10 per trade), while others charge nothing. You also have access to the secondary market, meaning you can buy Treasuries that other investors are selling before maturity.

The trade-off is convenience versus cost. TreasuryDirect has no fees and no minimum, but you can only buy new Treasuries at auction and cannot sell before maturity without moving your holdings to a bank or brokerage first. A brokerage account costs nothing to open and gives you more flexibility, but you may pay a small fee per transaction. If you already have a brokerage account for stocks or mutual funds, buying Treasuries there is often the easiest route.

What happens to your money if you sell before the Treasury matures

If you hold a Treasury until maturity, you get exactly what you paid plus the interest owed — no surprises. But if you sell before maturity on the secondary market, the price you receive depends on interest rates. When interest rates rise, existing Treasuries become less valuable because new Treasuries pay higher rates. When rates fall, existing Treasuries become more valuable because they pay higher rates than new ones.

For example, suppose you buy a $10,000 Treasury note paying 4% interest with five years left to maturity. If interest rates rise to 6%, a buyer would rather buy a new Treasury paying 6%, so they will only pay about $9,200 for yours. You lose $800. If rates fall to 2%, your 4% note becomes attractive and you might sell it for $10,800. You gain $800. This price movement only matters if you need to sell before maturity. If you hold to maturity, you receive the full $10,000 regardless of rate changes.

How Treasury interest rates are set and why they change

Treasury rates are determined by auction. The Treasury announces how much it wants to borrow and investors bid on what rate they will accept. If many investors want to buy, rates stay low because demand is high. If few investors want to buy, rates rise to attract more bidders. The Federal Reserve's interest rate decisions influence Treasury rates, but they are not the same thing. When the Fed raises its benchmark rate, Treasury rates typically rise too, but with a lag.

Longer-term Treasuries pay higher rates than shorter-term ones because you are taking on more risk — interest rates could rise further during your holding period, making your Treasury worth less if you need to sell. This difference is called the yield curve. In normal times, a 30-year bond pays 1% to 2% more than a 1-year bill. When the yield curve inverts (short-term rates higher than long-term rates), it often signals economic uncertainty.

Treasury rates change constantly during the trading day, but the rates that matter for new purchases are set at auction. You can check current rates and upcoming auction dates on TreasuryDirect.gov or your brokerage platform. Rates are updated daily and historical data is available if you want to see how rates have moved over time.

Tax treatment of Treasury interest and how it affects your returns

Interest from Treasuries is subject to federal income tax but exempt from state and local income tax. This is a significant advantage if you live in a high-tax state like California or New York. For example, if you earn $500 in Treasury interest and live in a state with 10% income tax, you owe federal tax on the full $500 but no state tax. A bond from a corporation would be taxed at both federal and state levels.

You report Treasury interest on your federal tax return each year. If you hold the Treasury in a taxable account, you receive a Form 1099-INT showing the interest paid. If you hold it in a tax-deferred account like an IRA or 401(k), you owe no tax until you withdraw money from the account. Many investors use Treasuries in IRAs to lock in a may provide return without annual tax bills.

If you sell a Treasury before maturity at a gain or loss, that gain or loss is treated as a capital gain or loss for tax purposes. Gains are taxed at your ordinary income tax rate if you held it less than one year, or at the lower long-term capital gains rate if you held it more than one year. Losses can offset other capital gains or up to $3,000 of ordinary income per year.

Frequently Asked Questions

What is the minimum amount I need to invest in Treasuries?

The minimum purchase is $100 for most Treasuries, and you can buy in $100 increments after that. TreasuryDirect has no account minimum. If you buy through a brokerage, minimums vary by firm but are usually $0 to $1,000 depending on the account type.

Can I lose money on a Treasury if I hold it to maturity?

No. If you hold a Treasury until maturity, you receive the full face value plus all interest owed, regardless of what happens to interest rates. You only risk a loss if you sell before maturity and rates have risen since you bought.

How do I know what rate I will get when I buy a Treasury?

If you place a non-competitive bid on TreasuryDirect, you accept the rate set at auction — you do not know it in advance, but it is may provide once the auction closes. If you buy through a brokerage, you see the current market rate before you buy and can accept or reject it.

Should I buy Treasury bills or bonds if I am saving for retirement?

Bonds (20 or 30 years) typically pay higher rates than bills and are better for retirement savings because you have a long time horizon. Bills are better for money you need within a year. Notes (2 to 10 years) work well for intermediate goals. Consider your time horizon and when you will need the money.

What happens if I need my money before the Treasury matures?

You can sell your Treasury on the secondary market through a brokerage or by transferring it from TreasuryDirect to a brokerage account. You will receive whatever the market price is at that time, which may be more or less than you paid depending on interest rate changes.