Treasury Notes
What are Treasury Notes?
Treasury Notes are government issued debt instruments with maturities between 2 and 10 years. To be exact, they are issued in 2, 3, 5, and 10 year increments. As opposed to Treasury Bills, T-Notes earn periodic interest payments semi-annually until the note matures. Treasury notes are sold through a single price dutch auction, in which the price and rate of the bond are determined. They can be bought through the government directly through the TreasuryDirect system or through a banking institution and they are issued in denominations of $100.
Just like the T-bills, T-Notes limit the buyer in an amount up to 35% of the auctioned amount with competitive bids and $5 million for non-competitive bids.
Notes are exempt from state & local taxes but subject to federal taxes.
When are Treasury Note Auctions Held?
The 2, 3, and 5 year auctions are held every month. The 10 year has original issuance in February, May, August, and November but has a re-opening of a previously issue security in all other months. Re-opened securities will provide the same terms to maturity and interest rate; however, it will have a different purchase price to adjust for the current interest rate environment.
Purchase a Specific Cash Flow of a T-Note
Rather than holding the Note till maturity, some investors will look to purchase a specific cash flow. They may want to receive a fixed amount on a fixed date. Remember, T-Notes are not like T-Bills in that they have periodic interest payments. Therefore, to circumvent this, the treasury enabled banks to STRIP the cash flows from each security and sell them individually to investors. This option only exists for treasury notes, treasury bonds and treasury inflation protected securities.
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