Treasury Notes

A Treasury Note (often shortened to "T-Note") is a loan you make to the U.S. federal government for a fixed number of years, in exchange for regular interest payments and your original money back at the end. It sits in the middle of the U.S. government debt family: Treasury Bills are the short end (a year or less), Treasury Notes are the middle stretch, and Treasury Bonds are the long end (issued with the longest maturities).

When you buy a T-Note, you're buying a piece of paper (electronic these days) that promises two things: a fixed interest payment, called the coupon, paid out twice a year, and repayment of the original amount you lent, called the face value or par value, when the note matures. The coupon rate is set when the note is issued and doesn't change, but the price of the note can move up and down in the secondary market before it matures, depending on where prevailing interest rates are.

The nuance that trips people up is the difference between the coupon rate and the yield. The coupon is fixed in dollar terms, but if you buy the note above or below its original face value on the secondary market, your effective return — the yield — is different from the coupon rate. If interest rates rise after a note is issued, its price tends to fall, because new notes coming out pay more, making the old one relatively less attractive. This price-yield relationship is the same mechanic that drives Treasury futures and Treasury ETFs.

Day traders rarely hold notes to collect coupons; they trade the price swings in note futures or in yield itself, which moves constantly in response to economic data, Federal Reserve policy expectations, and inflation reports.