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Treasury Securities

Treasury Securities – Learn What They Are and How to Trade Them

When it comes to low-risk investments, nothing says risk-averse like Treasury securities. Many investors turn to these instruments to preserve their capital in times of turbulence in other financial markets. In fact, there’s hardly ever any other investment opportunity that carries such strong safety guarantees for both principal and interest returns. 

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What Are Treasury Securities?

Treasury Securities are debt instruments the U.S. government issues when it wants to raise funds. Many people also call them Treasury bonds. People who buy these instruments are essentially loaning money to the government, under the promise that it will pay it back with interest over a given period. 

Many investors consider buying Treasury securities one of the safest investments. The reason being that they have the full backing of the government. This means your principal value is protected as long as there’s a government. No matter if it’s inflation, recession, or even a pandemic. Additionally, any interest earned on said principal is only taxed at the federal level. 

This safety guarantee is one of the key fundamentals of this market. It is what makes Treasury securities so attractive to both individual and institutional investors who are looking for steady returns over the long term.

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There are three main categories of Treasury securities: Treasury bills, Treasury bonds, and Treasury notes. Let’s look at each in detail:

Treasury Bills

These are securities that mature in the short term, usually ranging from a few days to a year. They are also known as T-bills. There is no interest earned on Treasury bills. Instead, you can buy them at a discounted price compared to their actual face value. On the maturation date, the principal amount will be returned to you, but this time at its actual value.

For example, you might purchase a $10,000 T-bill that will expire in two months for only $9,900. After two months, the government pays you $10,000. 

Maturity periods for Treasury bills are usually available in five different terms. These are 52 weeks, 26 weeks, 13 weeks, 8 weeks, and 4 weeks. A variation of T-bills, known as the cash management bill, doesn’t follow a regular schedule and usually matures after a few days. 

Treasury bills are the only type of Treasury security that exists in both the money and capital markets. 

Treasury Bonds

Out of all Treasury securities, Treasury bonds (T-bonds) have the longest maturity. Typically it’s 10 years and above, sometimes even up to 30 years. Interest earned on T-bonds is paid out twice a year until maturity. 

You can buy Treasury bonds directly from the government or through a broker. They are issued at actual par value. Let’s say you purchased a 20-year T-bond worth $50,000, with a 5% yearly coupon. The government will pay you $2,500 every year for the next 20 years and, at the maturity date, pay back your original $50,000. 

Original issues of Treasury bonds are auctioned four times a year in February, May, August, and November. The reopening and re-auctioning of existing T-bonds happen during the other eight months. 

Because of the longer maturity date, Treasury bonds typically have higher yields compared to other Treasury securities. Still, they usually offer better interest rate returns than bank savings accounts and even some time deposits. 

Treasury Notes

T-notes are intermediate-to-long term Treasury securities with maturity dates typically ranging from two to ten years. There are five available terms for Treasury notes. These are the 2-year, 3-year, 5-year, 7-year, and 10-year notes. 

Like Treasury bonds, T-notes are issued at par value with fixed interest payments paid out to the bearer twice a year. The principal is then paid out at maturity. Auctions are also conducted every month with original notes being issued in February, May, August, and November, and reopenings during the remaining eight months. 

Treasury notes offer a viable middle ground between the relatively higher risks associated with long-term T-bonds and the low payouts that come with short-term T-bills. This makes them the ideal choice for beginners who are looking to start trading Treasury securities

Before 1984, the U.S. Treasury issued callable Treasury notes, meaning under certain conditions, the notes could be repurchased. Interest rates vary, typically depending on the length of the term. 

History of Treasury Note Futures

Treasury futures can help manage risks typically associated with fixed-income security investments. In this case, however, you are speculating on how high or low you believe interest rates will rise or fall in the future. 

History of Treasury Note Futures
Snapshot of T-Note Futures for 2-Year Term | Source: finamarksys.com

Interest rate futures were introduced in 1975 by the Chicago Board of Trade (CBOT). At the time, the cost of money was experiencing frequent volatility, and it became necessary to come up with instruments to help mitigate the risks. This led to the creation of Treasury bond futures, and later the Treasury notes futures for the 2-year, 5-year, and 10-year terms.

The T-Note Futures Market

By investing in Treasury note futures, you can assess which direction interest rates will likely go over the maturity period and protect against associated risks, especially towards the end of a yield curve. 

The 10-year T-note futures contract is one of the most commonly traded Treasury securities. Both individual and institutional investors use it. It is generally a good indicator of the current state of the economy. 

During times of economic turbulence, many investors flock to the safety of Treasury note futures to protect their wealth. This is what we refer to as “flight-to-quality” investing. It eventually leads to lower interest rates since more and more investors are entering the treasury market. Meanwhile, times of economic growth cause investors to opt for instruments with higher potential returns. This leads to less demand for treasuries and rising interest rates. 

Treasury note futures contracts are traded on the Chicago Mercantile Exchange (CME) GLOBEX platform after the CME Group acquired CBOT back in 2007. 

Contract Unit $100,000 nominal value
Product codeCME Globex: ZNCME ClearPort: 21Clearing: 21
Price Quote100 points basis 
Trading Hours Sunday – Friday 5:00 PM – 4:00 PM Chicago Time).  Monday – Thursday 4:00 PM. – 5:00 PM CT) 
Minimum Tick Movement½ of 1/32 of one point
Minimum Tick Value$15.625
Contract MonthsMarch, June, September, and December
Settlement Deliverable
Trading Termination Trading ends on the 7th business day before the last business day of the delivery month. For expiring contracts, trading terminates at 12:01 p.m. on the last day of trading
Last Day of Delivery Last business day of the delivery month
Contract Specifications for 10-Year T-Note Futures | Source: CME

Relationship Between Price and Interest Rates 

Prices of Treasury securities typically have an inverse relationship with interest rates since the rate of return is fixed at the time of issuance. This is the case for most fixed income securities. This means as prices go up, the interest rates go down, and vice versa. 

It is important to note this inverse relationship because it can help determine ideal times to buy Treasury securities. Let’s say a 10-year Treasury bond pays a coupon rate of 6%, and interest rates go down to 5%. It makes sense to buy more bonds. 

There are many reasons why interest rates may rise over a given period, including: 

  • Rising demand for loans and other forms of external funding
  • Allocation of bond assets into stocks in a bid to maximize potential returns
  • Fiscal policy changes 
  • Monetary policy changes

Conversely, interest rates may drop for a number of reasons, including: 

  • Lower demand for loans
  • Financial uncertainty that causes stock investors to turn to Treasury securities as a safe haven 
  • Introduction of interest rate cuts as deemed necessary by the Federal Reserve Board

Barring any events that can cause sudden economic changes (e.g. the COVID-19 pandemic), broad changes in interest rates in the U.S. have often occurred over several months or even a few years. This makes the Treasury market relatively stable over the long term. 

The Difference Between Treasury Bills vs Notes vs Bonds

The different types of U.S. Treasury securities share several key similarities in that they all represent some form of government debt and are repayable over a certain period. There are, however, a number of key differences between them worth highlighting: 

Maturity Period 

Treasury bills have the shortest terms, typically from a few weeks up to a year. Meanwhile, Treasury notes have intermediate maturities, ranging from two years to over a decade. Finally, Treasury bonds have the longest maturity periods with terms going as high as 30 years. 

Interest Paid 

T-bills are non-interest bearing. On the other hand, T-notes and T-bonds both bear interest and are paid twice a year to the bondholder. 

Par vs Discount Value 

To make up for the fact that T-bills do not bear interest, investors get to purchase them at a price below to their actual value. Upon maturity, the par value is paid to the investor and the difference or spread becomes their gain. Conversely, Treasury notes and Treasury bonds are both purchased at par value. 

In the end, the main difference between T-bills and T-notes is their term tol maturity. 

Benefits of Treasury Securities 

  • Guaranteed returns Treasury securities are among the safest investment options available today. As long as the U.S. government is functional, you can be sure of receiving what they owe you when due. 
  • Steady income – T-notes and T-bonds pay fixed interest rates semiannually. This means you know exactly how much you’re getting and when to expect it. 
  • Various maturity terms – There are several maturities to choose from with Treasury securities, so it’s easy to find the ones that best suit your goals.  
  • Tax exemption – Interest on Treasuries is only taxable at the federal level; state and local levels are tax-free.
  • High liquidity – Treasuries boast the most liquid markets when it comes to fixed income instruments. Even if you’re unwilling to wait until the maturity period, you can easily sell your Treasuries at the secondary market.  

Risks of Treasury Securities 

  • Inflation – This risk refers to the inflation rate potentially higher than the interest an investor may earn when holding treasuries. In this case, your real return is negative, and your investment actually loses value over time. This risk mostly applies to low yielding treasuries in higher inflation environments. 
  • Changes in interest rates – Fixed income securities can lose value if interest rates increase.
  • Economic growth – During high economic growth, businesses thrive and compete for capital from investors. As a result, Treasury securities’ value decreases inversely to the demand for higher risk investments with better returns.

Trading Strategies for Treasury Securities 

Whether you’re in it for the short term or the long run, investing in Treasury securities requires you to have a clear goal. You also need the right strategy in place to achieve it. With that in mind, let’s start by looking at three common trading strategies: 

Buy and Hold

As the name suggests, you simply buy the treasuries and hold them until maturity. This strategy is ideal for beginners and investors who favor a passive approach. Keep in mind that this takes discipline, especially with bonds that have really long maturity periods. 

Still, it is one of the best ways to ensure a steady income and maximize returns without exposing yourself to too much risk. 


If you’re looking to be more active with your trades, then you can buy or sell treasuries directly on the secondary market. Of course, this means the purchase prices and subsequent returns will no longer be based on the face value of the security since you won’t be holding it to maturity. In this instance, laddering can be a great starting point. 

This strategy simply means you’re acquiring multiple bonds, each with its own maturity period, whether long or short. When one bond matures, you collect the returns and use it to buy another security with a longer-term maturity. This way, you have a steady income stream while also being able to withstand possible changes in value to the other treasuries in your portfolio, 


This is similar to the laddering strategy, except it involves taking advantage of tax write-offs. Under swapping, you’re selling treasuries that are not likely to recover and get a tax write-off for the loss. You’ll then use the proceeds to buy securities with a high probability of profitable yields. 

It’s basically cutting your losses and investing in stronger assets to maximize your returns and hedge your portfolio. Obviously, this strategy is more suited to experienced investors who can afford to take on more risk and can absorb potential losses over the short term. 

How to Trade Interest Rate Derivatives

Since Treasury securities and interest rates often go hand in hand, it is important to have an idea of interest rate derivatives and how they work. Interest rate derivatives are financial instruments whose value is derived from the movements of an interest rate. Here the underlying asset is linked to your right to make or receive payments at a given interest rate. 

Investors use interest rate derivatives as a hedge against potential fallouts from changes in market interest rates. Their other use is to speculate on the direction of interest rate changes in the future. There will always be some form of risk in trading interest-bearing securities. That’s because any changes in the interest rate can impact its value. 

Examples of interest rate derivative instruments include options, futures, caps, and even swap contracts.

Interest Rate Futures 

In the case of interest rate futures, both the buyer and seller of the contract agree to deliver ownership of a specified Treasury security at a future date. This lets them lock in the price of the security now and hedge against interest rate changes. 

Interest Rate Swaps

This is the most common type of interest rate derivative and involves two parties. The first party makes interest payments based on a fixed interest rate and receives interest payments based on a floating interest rate. The other does the opposite. It receives payments based on fixed interest rates and makes payments based on floating interest rates. Principal values are the same. In this way, the former counterparty can limit its risk exposure when market interest rates increase because they’ll receive more interest. Meanwhile, the other party benefits when interest rates decrease so that they’ll need to pay less interest. 


As the name indicates, this is both an option and a swap; two derivatives in one instrument. The premise is quite straightforward, an option gives the buyer the right to enter into a swap at a given future date. 

With a swaption, the contract is based on an interest rate swap instead of any underlying security. If the buyer chooses to exercise the option, the predetermined swap conditions of the contract activate. 

There are two types of swaptions, including payer and receiver swaptions. A payer swaption gives the buyer the right to exercise the option and pay a fixed interest rate and receive a floating rate. A receiver swaption is the opposite, the buyer has the right to pay variable and receive fixed interest.

Final Thoughts

Treasury securities have been around for some time now and even make up a considerable portion of the domestic and global bond markets. As with any form of investing, make sure to conduct proper due diligence before embarking on the trade. You can visit the US Treasury website to learn more about Treasury securities and which ones best suit your investment goals.   

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