T-Notes (also known as Treasury Notes) are a type of debt security issued by the U.S. Department of the Treasury to finance government spending. Think of them as a loan you make to the U.S. government. In return for your loan, the government promises to pay you a fixed interest rate every six months until the note matures, at which point it repays your original loan amount, known as the par value. T-Notes are issued with maturity periods of 2, 3, 5, 7, and 10 years, placing them in the middle of the government debt spectrum, between short-term T-Bills and long-term T-Bonds. Because they are backed by the “full faith and credit” of the U.S. government, they are considered one of the safest investments on the planet. This safety makes them a cornerstone for conservative investors and a benchmark for the entire financial world.
Investing in a T-Note is straightforward. They are typically sold via auctions, but most investors buy them through a broker or the TreasuryDirect website. Once you own a T-Note, you receive interest payments, called coupon payments, twice a year. For example, if you buy a $1,000, 10-year T-Note with a 3% coupon rate, you will receive $30 in interest per year. This is paid out in two $15 installments every six months for the entire 10-year term. At the end of the 10 years, when the note “matures,” the government pays you back your original $1,000 principal. While you can hold a T-Note until it matures, they are also highly liquid, meaning they can be easily bought and sold on the secondary market. On this market, their price fluctuates. If new T-Notes are being issued with higher interest rates, the price of your older, lower-rate note will fall, and vice-versa. This inverse relationship between price and prevailing interest rates is a key concept for all bond investors. The effective rate of return based on the current market price is known as its yield.
For a value investor, whose primary goal is to buy assets for less than their intrinsic worth, T-Notes play a different but vital role. You don't “value” a T-Note in the same way you value a business like Coca-Cola. Instead, its value lies in its function as a tool for risk management, capital preservation, and discipline. The great Benjamin Graham, the father of value investing, advocated for a portfolio balanced between stocks and high-quality bonds for the “defensive investor.” T-Notes fit this role perfectly.
While incredibly safe from default, T-Notes are not entirely without risk.