Treasury Bonds Definition: Treasury bonds are long-term debt securities issued by the US Department of the Treasury, with maturities of 20 or 30 years, that pay a fixed interest rate every six months and return the face value at maturity. Backed by the full faith and credit of the US government, they are treated as close to free of default risk, but their prices move sharply when long-term interest rates change.
What Are Treasury Bonds?
When the US government spends more than it collects in taxes, it borrows the difference by selling IOUs to investors. Buy one and you lend money to the government, which promises to pay you interest twice a year and repay the full amount on a set date. A Treasury bond is the longest version of that promise.
People often use “Treasuries” for all US government debt, but the Treasury Department sorts it by maturity. Treasury bills mature in one year or less and pay no coupon, since you buy them below face value. Treasury notes run from two to 10 years. Strictly speaking, only the 20-year and 30-year securities are Treasury bonds, although the 10-year note is the one traders quote most.
Every bond carries a coupon, the fixed interest rate set at issue, and a yield, the return a buyer earns at today’s market price. The coupon never changes. The yield moves every second the market is open, and that difference is where both the opportunity and the risk sit for traders.
How Do Treasury Bonds Work?
The Treasury sells new bonds at scheduled auctions. Large banks called primary dealers must bid, alongside pension funds, foreign central banks and individual investors. The auction sets the yield, and the coupon is fixed close to it. After that, the bond trades freely in the secondary market until it matures.
Price and yield move in opposite directions. A bond’s payments are fixed, so the only way a buyer can earn a higher yield is by paying less for the same stream of cash. When market rates rise, existing bonds with lower coupons lose value until their yields match new issues.
Take a newly issued 30-year Treasury bond with a $10,000 face value and a 4% coupon. It pays $200 every six months, and if market yields stay at 4% the bond keeps trading near $10,000. Now suppose inflation surprises and long-term yields climb to 5%.
Buyers can now get 5% on new bonds, so nobody will pay $10,000 for yours. Its price falls to about $8,455, a loss of roughly 15%, even though the government has not missed a single payment. A 2-year note with the same coupon would drop only about 2%, to $9,812, because its principal comes back much sooner. That sensitivity, called duration, is what makes long bonds a leveraged bet on the direction of rates.
Types of Treasury Securities
- Treasury bills: 4 to 52 weeks. Sold at a discount and repaid at face value, with the difference as the investor’s return.
- Treasury notes: two, three, five, seven and 10 years. Semiannual coupons, and the 10-year note serves as the global benchmark for long-term rates.
- Treasury bonds: 20 and 30 years. The Treasury stopped issuing the 30-year bond in 2001, brought it back in 2006, and reintroduced the 20-year bond in 2020.
- TIPS: inflation-protected notes and bonds whose principal rises with the consumer price index.
Why Are Treasury Bonds Important for Traders?
Treasury yields are the base rate for the rest of finance. Mortgage rates, corporate bond yields and the discount rates analysts use to value stocks all start from the Treasury yield of a similar maturity and add a premium for extra risk. When the 10-year yield rose above 5% in October 2023 for the first time since 2007, borrowing costs rose across the economy, not only for the government.
Treasuries also act as one of the main safe haven assets. In a stock market sell-off, money often rushes into Treasuries, pushing their prices up and yields down. That makes them a common hedge in balanced portfolios, and it is why traders watch Treasury yields alongside the dollar during a crisis.
Safe from default does not mean safe from loss. After the Federal Reserve began raising rates in 2022, long-dated Treasuries suffered their worst drawdown in modern history. The iShares 20+ Year Treasury Bond ETF lost roughly half its market price between its August 2020 peak and October 2023. Holders who kept the bonds to maturity would still get every dollar back, but anyone forced to sell took the loss, as Silicon Valley Bank did in March 2023.
Credit questions have not disappeared either. S&P stripped the US of its AAA rating in August 2011 after a fight in Congress over the debt ceiling. Treasury prices actually rose that week as investors fled riskier assets, which shows how deep the market’s trust in US debt runs, but repeated debt-ceiling standoffs remain a recurring source of volatility in short-term bills.
Treasury Bonds vs. Corporate Bonds
| Treasury Bonds | Corporate Bonds | |
|---|---|---|
| Issuer | US Department of the Treasury | Private companies |
| Default risk | Near zero | Depends on the company’s credit rating |
| Yield | Benchmark, lowest for a given maturity | Treasury yield plus a credit spread |
| Behaviour in a crisis | Prices usually rise as investors seek safety | Prices usually fall as default fears grow |
| Tax (US investors) | Exempt from state and local income tax | Fully taxable |
The gap between the two yields is the credit spread, and traders read it as a fear gauge. When spreads widen quickly, investors are demanding more to hold company debt, which often comes before weaker stock markets. A narrowing spread signals growing confidence. Watching how Treasury yields at different maturities compare also tells you whether the yield curve is steepening or inverting, another widely used read on the economy.
Key Takeaways
- Treasury bonds are US government debt with 20- or 30-year maturities that pay a fixed coupon every six months and repay face value at maturity.
- Bond prices move opposite to yields, and the longer the maturity, the larger the price change for each move in rates.
- Treasury yields form the base rate for mortgages, corporate debt and stock valuations, so changes in them ripple across every market.
- Treasuries carry almost no default risk but real interest rate and inflation risk, as the 2020–2023 drawdown in long bonds showed.
- In a crisis, investors usually buy Treasuries and sell corporate bonds, which widens the credit spread between them.
Are Treasury bonds risk-free?
They carry almost no default risk, because the US government borrows in dollars it can always raise. They do carry interest rate risk and inflation risk, and a 30-year bond can lose a large share of its market value if yields rise.
What is the difference between a Treasury bond and a TIPS?
A regular Treasury bond pays a fixed coupon on a fixed principal. Treasury Inflation-Protected Securities adjust their principal in line with the consumer price index, so the interest payments rise with inflation.
Do you have to hold a Treasury bond until maturity?
No. Treasuries trade every business day in the secondary market, so you can sell at any time. The price you get depends on current yields, which may be above or below what you paid.
Why do Treasury yields matter for stocks?
The 10-year and 30-year yields set the benchmark return an investor can earn with almost no credit risk. When those yields rise, future company profits are worth less when discounted back to the present, which tends to weigh on stock valuations, especially for fast-growing companies.
