Treasury Bills vs Notes vs Bonds: Maturities, Yields and Taxes

Overview of U.S. Treasury Marketable Securities

Comparing treasury bills vs notes vs bonds shows three distinct categories of U.S. Treasury marketable securities: bills for short-term needs, notes for medium-term horizons, and bonds for long-term commitments. Bills mature in one year or less and are sold at a discount to face value, with the difference paid as interest at maturity. Notes mature in two to ten years and pay semiannual coupon interest. Bonds extend to twenty or thirty years and also pay semiannual coupons.

All three types are issued exclusively in electronic book-entry form, with no physical certificates. Ownership records are maintained through TreasuryDirect or brokerage accounts. A consistent tax rule applies: interest and discount amounts are exempt from state and local income taxes yet remain subject to federal income tax. The discount received on bills is treated as ordinary interest income.

This framework gives investors government-backed choices across different time frames while clarifying the federal tax obligation on returns.

Maturities and Payment Structures

U.S. Treasury bills mature in one year or less and are issued at a discount to face value, with the difference paid as interest only at maturity. Regularly auctioned bill terms include 4, 6, 8, 13, 17, 26, or 52 weeks, while cash management bills carry variable terms. All bills settle in electronic book-entry form.

Notes cover medium-term maturities of 2, 3, 5, 7, or 10 years and pay semiannual coupon interest. The coupon rate is fixed at auction, and payments occur every six months until maturity. Notes are also issued exclusively in book-entry format on a regular auction schedule.

Bonds extend to long-term maturities of 20 or 30 years and likewise deliver semiannual coupon interest. Like notes, their coupon is determined at auction, and interest is paid twice yearly over the full term. Both notes and bonds follow consistent auction calendars that support predictable semiannual cash flows for investors.

These maturity bands and payment mechanics create distinct risk and income profiles. Short-term bills provide a single payment at maturity, while notes and bonds generate recurring semiannual coupons that can be reinvested or spent. Auction frequency ensures new supply aligns with each maturity segment without overlap in standard terms.

Auction Pricing, Yields, and a Comparison Table

The coupon rate on notes and bonds is set at auction to equal the high yield accepted by the Treasury. When secondary-market yields later exceed that coupon, the price trades below par; when yields fall below the coupon, the price trades above par. Bills, by contrast, carry no coupon and are always issued at a discount to face value.

Federal Reserve H.15 data released 2026-09-01 show the following secondary-market yields (data through 2026-08-31):

Illustrative auction results include a 20-year bond with high yield 1.850% (coupon 1.750%, price 98.336995) and a 7-year note with high yield 1.461% (coupon 1.375%, price 99.429922). These mechanics allow investors to compare expected returns across the curve while understanding that price adjustments keep yields aligned with prevailing market rates.

Tax Treatment of Interest and Discount

U.S. Treasury marketable securities receive consistent federal tax treatment under IRS Publication 550. The discount on Treasury bills counts as ordinary interest income and is taxed at maturity or upon sale, even though no cash interest payment occurs before then. Notes and bonds generate semiannual coupon payments that are likewise taxed as ordinary federal income in the year received.

All three security types remain exempt from state and local income taxes on both principal and interest, a rule codified in 31 CFR § 309.4. This exemption applies whether the investor holds the security to maturity or sells it in the secondary market.

Investors receive Form 1099-INT from TreasuryDirect or their broker reporting the taxable amounts. Bill holders must recognize the full discount as income in the year the bill matures or is sold, while note and bond holders report each coupon payment on their federal return. Capital gains or losses may arise only from price changes between purchase and sale, not from the original discount or coupon accrual itself.

Because the tax rules treat bill discount and note or bond coupons uniformly as ordinary income at the federal level, investors in higher tax brackets face the same ordinary-income rates on these instruments regardless of maturity length.

Current Market Yields and Recent Auction Examples

The Federal Reserve H.15 release dated 2026-09-01 reports secondary-market discount rates for Treasury bills at 3.69 percent for 4-week, 3.78 percent for 3-month, 3.89 percent for 6-month, and 3.97 percent for 1-year maturities. Constant-maturity nominal yields on the same date stand at 3.85 percent for 1-month, 3.91 percent for 3-month, 3.99 percent for 6-month, 4.16 percent for 1-year, 4.34 percent for 2-year, 4.40 percent for 3-year, 4.49 percent for 5-year, 4.62 percent for 7-year, 4.75 percent for 10-year, 5.24 percent for 20-year, and 5.25 percent for 30-year Treasuries.

These figures reflect the prevailing term structure after the close of trading on 2026-08-31. Traders compare them directly to auction results to gauge whether new issues are priced attractively relative to the secondary market.

Illustrative auction data from TreasuryDirect show a 20-year bond clearing at a high yield of 1.850 percent with a 1.750 percent coupon and a price of 98.336995 per 100 face value. A 7-year note auctioned at a high yield of 1.461 percent with a 1.375 percent coupon priced at 99.429922. Although these examples predate the September 2026 yield levels, they demonstrate how the coupon-to-yield relationship determines whether an issue sells at a discount or premium.

Market participants monitor both constant-maturity series and actual auction outcomes to assess duration exposure and reinvestment risk across the bill, note, and bond segments.

FAQ

How do I decide between buying Treasury bills, notes, or bonds?

Choose based on your time horizon and need for regular income. Bills suit short-term needs with maturities of one year or less and pay interest only at maturity. Notes and bonds provide semiannual coupon payments for horizons of 2 to 30 years.

How is the discount on a Treasury bill reported for federal taxes?

The discount counts as ordinary interest income under IRS Publication 550. Report it at maturity or upon sale, even though no cash interest is paid until then.

Can I buy Treasuries directly through TreasuryDirect auctions?

Yes. All marketable securities are issued in book-entry form through TreasuryDirect auctions on fixed schedules, with no broker required for competitive or noncompetitive bids.

What do the secondary-market yields on the Federal Reserve H.15 release mean?

The release dated 2026-09-01 shows constant-maturity yields such as 4.75 percent for the 10-year and 5.25 percent for the 30-year. These figures help compare returns across maturities on a standardized basis.

Are Treasury interest payments exempt from state income tax?

Yes. Interest and the bill discount remain exempt from state and local income taxes while remaining fully taxable at the federal level as ordinary income.

What happens to my note or bond if I sell it before maturity?

The sale price reflects current market yields. If yields have risen since issuance, the price falls below par; if yields have fallen, the price rises above par, creating a capital gain or loss separate from the coupon interest already received.