“Series I Treasury Bonds are currently paying 9.62 percent purchased by October 2022. richcano/Getty Images
As the stock market continues its depressing spiral into a bear market (marked by significant and prolonged price declines), a lot of investors are exploring new options for their hard-earned cash. Although many people will keep investments in the stock market because, we hope, it’ll turn around eventually, others are diversifying into treasury notes and bonds as safer investments. While many people have heard of these investment options, a lot of us aren’t too sure what they actually are, how they make money and what the difference is between them, anyway.
Treasury notes and bonds are part of a group of securities used as "debt instruments." According to the U.S. Department of the Treasury, these securities are issued by the agency in order to generate necessary funds to run the federal government. So, if you buy a treasury note or bond you’re essentially paying for part of the U.S. government.
One of the first things to know about treasury bonds and treasury notes is that they’re less risky than stocks, as they’re U.S.-government-backed.
"Treasury notes and treasury bonds can be appropriate for investors seeking income from a high quality investment with a low risk of loss," says Brian Therien, senior fixed income analyst with investment firm Edward Jones. But that reduced risk comes at a price, he explains. "It’s still a low return relative to other investments." So, you wouldn’t want to put all your money there. "You want to make sure you have an appropriate allocation," Therien says, noting that the investor who allocates too much to treasury notes, for example, might not get the return on investment they need.
The basic difference between treasury notes and bonds is the length of time they must be held. Treasury notes mature in one to 10 years from their issue date. Bonds mature in more than 10 years from their issue date. ("Mature" means that’s when an investor gets his money back.) The longer the maturity period, the higher the interest rate.
For the purpose of this article, we’ll be talking about Series I Savings Bonds, which are very popular right now. In fact, the Treasury Dept. sold $17.5 billion worth of them for the six months ending in May 2022, compared with $364 million for the entire year of 2020, the Washington Post reported.
How Much Interest Is Earned?
When a treasury note is purchased, the interest rate is fixed at the moment of issuance. Then, the interest rate is paid out semiannually until maturity, says Therien. So, every six months or so the purchaser gets a cash payment based on the interest.
Interest rates for I bonds are calculated twice per year based on the current interest rate. I bonds are also paid out differently. Instead of regular payments, the interest is added to the balance of the bond, so it grows over time. When the I bond is eventually redeemed, the investor will be paid out one lump sum that includes the initial investment, plus the accrued interest.
Just because I bonds take 30 years to mature doesn’t mean you have to hold on to them for that long. The minimum holding period for these securities is at least 12 months, Therien explains. "After that, if you redeem them before five years, you forfeit three months of interest in penalty," he adds. So, it’s in the investor’s best interests to play the long game with these securities. However, with treasury notes there’s no minimum holding period, so they can be sold the very next day, if the investor so chooses.
Some people are hot to buy securities right now because the interest rates are higher than they were six months or a year ago, Therien says (as of June 2022 the rate for a treasury note is 3 percent). However, he’s quick to point out the rate is actually not that high compared historically — in 2000 it was over 6 percent; in the early 1990s it was over 8 percent; and the 1980s saw rates over 15 percent! "So, it’s higher recently, but certainly not high relative to history," Therien explains.
I bonds, however, are currently paying out an interest rate of 9.62 percent (confirmed through October 2022), the highest yield since being introduced in 1998. The reason the rate is so high is because I bonds are inflation protected, and inflation was 8.6 percent in May 2022.
The I bond interest rate is a combination of fixed and variable rates. The fixed rate is currently 0.0 percent and changes annually. The variable rate is 4.81 percent and changes semiannually. Multiplying 4.81 by 2 gives you an annual rate of 9.62 percent. The rate is good for six months after the purchase is made. So if you buy your bond on Aug. 1, 2022, the rate will apply until Jan. 31, 2023.
Buying Treasury Notes and Bonds
Both bonds and notes can be bought via the U.S. Treasury. However, treasury notes can be bought and sold in a variety of channels, including dealers, banks and brokers. "There’s a very deep market for these," Therien says. The reason that treasury notes are sold so often is because prices go up and down all the time.
I Bonds, however, are potentially a much longer commitment, as they cannot be sold to other parties and are nontransferable. "You can only [buy and] redeem them through the Treasury," Therien explains. "There’s no market in which they can traded or be sold."
The amount a person can buy of each is also different. Treasury notes can be purchased in $100 increments starting at $100 and going all the way up to $5 million. The maximum amount of I bond purchase per individual is $15,000, says Nilay Gandhi, senior financial adviser at Vanguard Personal Advisor Services. "$10,000 for electronic limits and another $5,000 for paper bond limits," he adds. Paper bonds are purchased when people elect to receive their tax refund as I bonds, Therien says, adding that I bonds can also be given as gifts up to $10,000.
Anyone interested in investing in treasury notes, I bonds or other securities should visit TreasuryDirect for more in-depth information, or consult a licensed financial adviser. (Note that setting up the account on the TreasuryDirect website may take a lot of patience. And if you try to call the customer service number you might be told that the wait time to speak to someone is two hours due to current high demand.)
This article should not be construed as financial advice.
Now That’s Cool
People who want to invest in securities but prefer not to play the long game can opt instead for treasury bills. These mature in one year, and at that time the purchaser is paid what it’s worth, called the par amount. They are usually sold at a lower rate than the par amount, so it’s common to make some good interest on these. The minimum purchase amount is $100, and the max is $5 million.
