Treasury Notes

Treasury Notes (often called T-Notes) are a type of government debt security issued by the U.S. Department of the Treasury. Think of them as a loan you make to the U.S. government. In return for your loan, the government promises to pay you back in full after a set period and also pays you regular interest along the way. T-Notes are considered intermediate-term investments, with maturity dates ranging from two to ten years (specifically 2, 3, 5, 7, and 10 years). They pay interest every six months at a fixed coupon rate determined at auction. When a T-Note matures, the investor receives the note's face value, also known as its par value. Because they are backed by the “full faith and credit” of the U.S. government, they are widely regarded as one of the safest investments on the planet, a crucial feature for any prudent investor looking to protect their principal.

T-Notes are first sold to the public through auctions. Both large financial institutions and individual investors can participate. As an individual, you typically have two ways to bid:

• Non-Competitive Bid: This is the simplest way. You agree to accept the interest rate that is determined by the auction. By placing this type of bid, you are guaranteed to receive the T-Notes you want to buy, up to a certain limit.
• Competitive Bid: Here, you specify the exact rate (or yield) you are willing to accept. If your bid is too low compared to the winning bids, you may not get any notes. This is typically used by more sophisticated, large-scale investors.

After T-Notes are issued, they can be bought and sold between investors on the secondary market, much like stocks. Their price on this market will fluctuate, primarily in response to changes in prevailing interest rates.

The beauty of a T-Note is its predictability. Let's say you buy a new 10-year T-Note with a par value of $1,000 and a coupon rate of 4%.

• Interest Payments: You will receive interest payments of $20 every six months for the next ten years.
  1. Calculation: ($1,000 x 4%) / 2 payments per year = $20 per payment.
• Maturity: At the end of the 10-year term, the government will pay you back your original $1,000 principal.

This creates a steady and reliable income stream, which is a key component of many conservative investment strategies.

For investors focused on capital preservation, T-Notes are a godsend. They offer a safe harbor during turbulent stock market periods and provide a reliable income stream. This stability allows you to sleep well at night, knowing that a portion of your portfolio is not subject to the wild swings of the equity market. They are a cornerstone for building the “defensive” part of a portfolio, a concept championed by the father of value investing, Benjamin Graham. While they won't produce explosive growth, their primary job is to protect your hard-earned capital.

The U.S. Treasury offers a family of debt products. It's helpful to know where T-Notes fit in.

• Treasury Bills (T-Bills): These are the short-term siblings, with maturities of one year or less. They don't pay a coupon. Instead, you buy them at a discount to their par value and receive the full face value at maturity. They have very little interest rate risk.
• Treasury Bonds (T-Bonds): These are the long-term patriarchs, with maturities of 20 or 30 years. Like T-Notes, they pay semi-annual interest, but their long duration makes them much more sensitive to changes in interest rates. If rates rise, the market value of an existing T-Bond will fall much more sharply than that of a T-Note.

T-Notes offer a happy medium, providing a better yield than T-Bills without the high interest rate risk of T-Bonds.

Value investors are obsessed with not losing money, and T-Notes align perfectly with this principle. While they won't make you rich overnight, they play a critical strategic role. Warren Buffett has famously referred to cash and cash-equivalents (like short-term Treasuries) as holding “call options” on future opportunities. When the market is frothy and finding attractively priced stocks is difficult, holding T-Notes allows an investor to park capital safely while earning a modest return. This provides the liquidity (or “dry powder”) needed to act decisively when fear grips the market and bargains appear. It's a classic case of playing defense to set up a winning offense. The interest from T-Notes might seem small compared to potential stock market gains, but it's far better than the permanent loss of capital that can come from chasing speculative fads or overpaying for a business.