9/29/06 EDIT: Following the suggestions from several posters, this thread has been expanded to include discussion of all Agency/GSE bonds: short, intermediate, and long maturities; at auction, issued at par, as well as in the secondary market.
For an introduction to what Agency/GSE securities are, please see recent posts in the T-bill thread about this topic! More information about them will be added here in the future.
Treasury notes are part of a series of marketable bonds issued by the U.S. Department of the Treasury. They form the intermediate maturity terms of the Treasury securities, and are currently sold in 2 to 10 year maturity terms. (per definition, they would also include Treasuries issued for over 1 year maturities)
The objective of this thread is to share information about the strategies, merits, techniques, and details of investing in them. This thread complements the Treasury bills thread (short term government bonds) and TIPS thread (inflation-protected government bonds).
Why look at T-notes at this time? We're at a point where we see a change in Fed (FOMC) policy. At the last FOMC meeting, for the first time in 17 meetings, the fed decided not to raise the target fed funds rate further. The expected outcome (supported by previous history, and yield curve forward rates, and fed funds futures) is that eventually we'll see cuts in the fed funds rate, at which point the yield curve will revert and shorter term investments will become unattractive compared to longer term. The suggestion is not necessarily that now is a good time to invest in them, but to learn about them and find out when a good time might come. There is an active fed funds rate discussion in the FOMC thread.
Treasury securities are protected with the full faith and credit of the U.S. government and therefore almost risk-free. T-notes are sold at auction in intervals ranging from monthly to quarterly, depending on the maturity. Unlike T-bills, T-notes are not zero-coupon bonds in the sense that you have to wait until maturity for the interest to be paid. Rather, the coupon interest (i.e. face value times coupon rate) is paid out in semiannual payments. The coupon is set at or before the auction by the Treasury department (usually a multiple of 1/8th of a percent) and is different from the yield determined at the auction based on the bids. Therefore, the actual price paid is slightly more or less than face value, depending if the auction yield is lower or higher than the coupon.
Some issues are later "reopenend" in which case a coupon rate determined from a previous auction would be used, but the new yield can be far off, making the price of the reopenend securities often significantly different from face value.
T-notes can also be purchased or sold on the secondary market for different than auction prices. The most important concept for market prices would be that they move inversely with prevailing rates. The price adjusts because the coupon payment is fixed. The bond's price will adjust until the added or subtracted value from face value matches the difference between the future cash flows of the coupon rate and prevailing market rates.
Recent T-note auction results are shown here and daily market yields can be found here.
Like T-bills, T-notes are state and local tax free, and a tax-equivalent yield can be calculated.
Following is a recent rate summary:
2 year .... 4.921% auction yield (08/31/06 issues) ... 4.88% market yield (08/28/06)
3 year .... 4.898% auction yield (08/15/06 issues) ... 4.80% market yield (08/28/06)
5 year .... 4.995% auction yield (07/31/06 issues) ... 4.77% market yield (08/28/06)
10 year ... 4.930% auction yield (08/15/06 issues) ... 4.80% market yield (08/28/06)
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- mariojm
- Senior Member - 2K
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Treasury Notes:
Tutorial on US Treasury Securities on InvestingInBonds.com
Tentative Treasury Auction Schedule
Upcoming Treasury Auctions ==> RSS feed
Treasury Yield Curve ==> RSS feed
Recent Treasury Auction Results
Agency/GSE Bonds:
Articles about GSE Debt on InvestingInBonds.com
Agency/GSE New Issues @ Fidelity
State Income Tax Exemption Status: Taxes and the Pricing of Government Sponsored Entity Bonds: p.26 in this academic paper has a matrix.
- Generally exempt from state income tax: FHLB (12 USC 1433), FFCB (12 USC 2023), TVA (16 USC 831n-4(d))
- Generally fully taxable at the state level: FNMA (Fannie Mae), FHLMC (Freddie Mac), GNMA (Ginnie Mae)
edit: by 1ofushere on 21 Dec 2006 - added Quick Tags
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- LH2004
- Frivolous Member
mariojm said:Treasury notes are part of a series of marketable bonds issued by the U.S. Department of the Treasury. They form the intermediate maturity terms of the Treasury securities, with 1-10 year maturity terms.Isn't it 2-10 -- the 1-year securities being bills?The coupon is determined by the Treasury department before the auction. At auction, the actual price is determined (which may be more or less than the face value), thereby giving an auction based yield that's (usually slightly) more or less than the coupon rate.Actually, the coupon rate is determined at the auction -- it's chosen to make the price come out as close to face as possible.
At least, that's how it worked when I was learning about this stuff; I don't know if it's changed since then.
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- mariojm
- Senior Member - 2K
-- Copied from TIPS thread ---
ThursdaysChild said:First question: when you buy T-notes at a discount, does the difference between the purchase price and the amount you receive at maturity count as "interest" the same as with T-bills? (and if so do your calculations have to take into account the time value of the interest you don't get until 2 - 10 years later) (and what about the extra (premium) you might pay on a re-opened note? is there such a thing as anti-interest?!?)
ThursdaysChild, welcome to the T-note thread. Very good question, I believe this is related to Original Issue Discount (OID). There is a fairly detailed description about it here including links to the official IRS publications. In a nutshell, what the article says is:
Original issue discount (OID) is a form of taxable interest that must be reported on your tax return. If you have a bond, note, or other long-term debt instrument that was originally issued for a lower price than its redemption price at maturity, part of the original issue discount (the amount that it increases in value each tax year towards maturity) must be included in your taxable income as interest on your tax return. You report original issue discount (OID) as it accrues, whether or not you receive any taxable interest payments from the bond issuer.
There's a form 1099-OID that's different from 1099-INT. So it looks like you don't have to figure out the OID for yourself, rather whoever holds your bond (broker, TreasuryDirect, etc) will report it for you. It's similar also to the OID on TIPS, since the maturity face value of TIPS is of course expected to be higher than the purchase price due to the inflation adjustments. (Incidentally, 5-year and 10-year TIPS are also T-notes.)
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- mariojm
- Senior Member - 2K
Welcome to the T-note thread, LH2004!
I'm using the T-note definition I found in several places including Investopedia as being 1-10 years. Completely agree with you that 2 years is the lowest currently being sold, but if the Treasury were to issue 1.5 year securities for whatever reason, they would be T-notes also. More strictly speaking it would be "greater than 1 year" i.e. not including 1 year. T-bills are defined as being up to and including 1 year although currently only up to 6-month T-bills are being sold (1-year bills were sold in the past).
As far as when the coupon rate is being determined ... you may be right that it's set at the auction, perhaps to the closest 1/8th percent just below the auction yield? But with reopened securities it's determined at a previous auction and the price adjusted accordingly. In any case, let's find out more about this one. My objective by mentioning this in the OP was merely that the auction yield is different from the coupon and the price is not exactly face value.
EDIT: made some corrections to address LH2004's comments.
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- LH2004
- Frivolous Member
mariojm said:As far as when the coupon rate is being determined ... you may be right that it's set at the auction, perhaps to the closest 1/8th percent just below the auction yield?Back when I was taking B-school Capital Markets, which was 6+ years ago, Treasury was in the process of switching from "conventional" to Dutch auctions; my understanding is that it's now all Dutch, i.e., everybody pays the same price in the auction. In the traditional format, I think the rule was, nearest 1/8 to the high yield. It should make very little difference in a Dutch auction. Anyway, Treasury interest rates are not very volatile; in the days before an auction, there should be little doubt about what the interest rate should be (unless the appropriate yield happens to be right about on a 'steenth, halfway between two possible values). In particular, there will be a whole set of previously-issued notes and bonds maturing at the same time as the to-be-issued note; the yield of the note will need to match up with them.But with reissued securities it's determined at a previous auction and the price adjusted accordingly.With a reissue, there really isn't any determination. If the Treasury decides to reissue a particular security, they're selling more that are exactly identical to that security in every way. So, there's really nothing to determine in that case.
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- mariojm
- Senior Member - 2K
Sorry, meant to say "reopened" not "reissued." I realized my mistake on the way home from work. Sorry, it's been a long day.
Essentially a few times a year, the Treasury reopens an auction, as ThursdaysChild had already mentioned, and the price can be very different because the coupon rate was determined at an auction some 3 to 6 months earlier, so the highest accepted yield can be very different from the coupon.
Do any of you know why the Treasury does this, reopen previous auctions?
I've also thought some more about LH2004's comment re 2-10 vs. 1-10 year definition and I've changed it in title and OP to make it less confusing. The 1-2 year is more of a technicality, I suppose.
Here is something I wonder ... if you buy a 30 year bond, 20 years later is it still called a "bond" or does it become a "note" by having a maturity less than 10 years? Or does the name stick with it? I guess the same could be asked if a "note" becomes a "bill" within 1 year, but notes and bills are distinctly different because of the zero-coupon nature of the bills. I don't see any difference between bonds and notes other than the maturity, or is there one?
LH2004 keep the good stuff coming - I'm sure your B-school capital markets course 6 years ago was more informative than my B-school "finance for non-business majors" course 6 years ago ... 
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- 1ofushere
- Member
mariojm said:
(snipped)
Here is something I wonder ... if you buy a 30 year bond, 20 years later is it still called a "bond" or does it become a "note" by having a maturity less than 10 years? Or does the name stick with it? I guess the same could be asked if a "note" becomes a "bill" within 1 year, but notes and bills are distinctly different because of the zero-coupon nature of the bills. I don't see any difference between bonds and notes other than the maturity, or is there one?
I am not a financial guru, nor in the financial business - just a private individual wishing to obtain returns on investments. Based on my experiences, I am not aware of ANY debt issue which has it's classification changed as the maturity draws closer. The issue continues to be known as it was identified when it was issued. This has been true with Treasury, federal Agency and general bond market debt issues.
If one had a financial reason for doing so, one can acquire Treasury bonds and non-treasury issues which had original maturities of any amount of years, which are now available on the secondary market. These can be found on "bond" sites and through brokers, and some can be viewed via print in the Wall Street Journal.
Although commissions must be accounted for, existing debt issues on the secondary market may be more advantageous financially than an new/reopened Treasury auction issue. Additionally, when buying on the secondary market, one can select the maturity date which fits in with one's planning needs. Some folks consider issues with specific interest payment dates to satisfy cash flow issues.
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- mariojm
- Senior Member - 2K
1ofushere said:mariojm said:
(snipped)
Here is something I wonder ... if you buy a 30 year bond, 20 years later is it still called a "bond" or does it become a "note" by having a maturity less than 10 years? Or does the name stick with it? I guess the same could be asked if a "note" becomes a "bill" within 1 year, but notes and bills are distinctly different because of the zero-coupon nature of the bills. I don't see any difference between bonds and notes other than the maturity, or is there one?
I am not a financial guru, nor in the financial business - just a private individual wishing to obtain returns on investments. Based on my experiences, I am not aware of ANY debt issue which has it's classification changed as the maturity draws closer. The issue continues to be known as it was identified when it was issued. This has been true with Treasury, federal Agency and general bond market debt issues.
If one had a financial reason for doing so, one can acquire Treasury bonds and non-treasury issues which had original maturities of any amount of years, which are now available on the secondary market. These can be found on "bond" sites and through brokers, and some can be viewed via print in the Wall Street Journal.
Although commissions must be accounted for, existing debt issues on the secondary market may be more advantageous financially than an new/reopened Treasury auction issue. Additionally, when buying on the secondary market, one can select the maturity date which fits in with one's planning needs. Some folks consider issues with specific interest payment dates to satisfy cash flow issues.
Welcome to the T-note thread, 1ofushere! So would there be a difference between buying a "T-note" on the secondary market that has, say, 5 years let to maturity vs. a "T-bond"? I'm guessing not. Advantages I can think of to buy on the secondary market are, as you said, specific maturity date, but also known yield ... as opposed to auctions where the yield is not known a priori (unknown auction yield not really a problem for weekly issued security types, but it can be an issue for those only issued a few times a year). Of course due to the middlemen in the secondary market you'll have more fees or lower yield than buying directly from the source.
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- mariojm
- Senior Member - 2K
For those who are not ready to become individual bond investors with multi-year commitment, there's also index funds/ETFs targeting the T-note segment. For instance, there are ETFs based on the following indices:
Lehman Brothers 1-3 Year US Treasury Index
Lehman Brothers 7-10 Year U.S. Treasury Index
Lehman Brothers U.S. Aggregate Index (this one is not just Treasury but also other bonds, avg. maturity 7 years)
If you own individual bonds you'd essentially be locking in the rate and your maturity will vary over time. The ETFs trade as if you'd constantly be buying and selling bonds, and their maturity stays roughly the same over time.
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- 1ofushere
- Member
mariojm,
As the Treasury uses a definition of more than 10 years maturity for 'bonds', perhaps the title for this forum should not mention the word "bonds" if it is to be a forum on T-notes.
With the view of allowing more folks to be able to find this forum with searches, and just to open-up the possibility of a name change for the forum, how about making a slight change to read as follows:
Treasury Notes: Investments in US government T-notes with 2 to 10 year maturities
Adding the words 'investments' and 'T-notes' might help folks doing searches of investment related topics to find this forum.
And depending on your feelings about the purpose of the forum title, one could add the phrase 'interest every 6 months' to perhaps offer additional interest in the forum with the word 'interest'. But, that may be going too far.
I can imagine folks who come across a topic suggesting 'notes' from the Treasury, confuse Treasury with the IRS, and say , No, NO - 'don't want any notes from them! 
By the way, for those wanting a fairly direct comparison between the T-bills, T-note and Treasury bonds, you might want to visit this link on the "Institutional" portal to the Treasury Direct web site. By clicking on the hot-linked topics of Bills, Notes and Bonds, one can get a very useful explanation of the general characteristics of each kind of debt.
And note the great little information box with the green tabs. I really like this single box for a quick overlook of the treasuries, and find the tab for the announced 'Upcoming Auctions' handy. One can get to the same info box if you just enter the Treasury Direct site by going to the 'Institutional' side using this . I have that set up as my main entrance for TD info now.
In fact, browsing and searching on the Institutional side for information somehow seems more fruitful for me than on the 'Individual' side. As one would expect that all of the info on the Treasury Direct site to be accessible from anywhere on the site, I am at a loss to explain my subjective impression. YMMV.
The Institutional side of TD might be useful for ThursdaysChild as they work on the FAQ for TD.
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- mariojm
- Senior Member - 2K
1ofushere, interesting suggestion about the title. I like the idea of including "investment" although I'd like to keep "bonds" also in the sense that these are debt instruments issued for a specific length of time for a specific rate. If anything I might change the "bonds" in the title to "debt instruments" or "securities" but it would probably cause more confusion than now. Agree with you that these need to be distinguished from Treasury bonds, which are also "bonds" but specific bonds. Wish the Treasury would call them T-dogs, T-bucks, T-stars, or something like that. Certaintly they have enough imagination to come up with a "zero percent certificate of indebtedness..."
It does appear that so far there hasn't been much interest in this thread - also not particularly much in the TIPS thread - at least as compared to the T-bills thread. Maybe people are just tired of seeing mariojm as OP with "Treasury" in the thread title. (How about I also start a T-bonds thread? ) Or perhaps I do need to improve this thread and the TIPS thread more, or make them more visible? We know from the two savings bonds threads that there's a good savings bond crowd at FWF, and from the CD thread that people are interested in longer-term CDs, and I think any of those investment styles could also benefit from learning about TIPS and T-notes.
Thanks for pointing out the info in TD, we really ought to encourage the use of its information portal, now that they organized it much better. Agree that it's strange that all this is "institutional" info. Not sure I like the green tab ... "discount rate" for the T-bills? (ThursdaysChild might disagree...)
EDIT: how's the title now?
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- 1ofushere
- Member
mariojm,
I believe the new title is a more apt description. I like it with the expanded text, so when a FE'er who is not savvy to the world of Treasuries, see's just that description in the multitude of single line forum titles, maybe, a spark of interest will be ignited.
As for your comment re: the apparent lack of interest in this thread so far, . . . , it's been up for just about 24 hours now judging from your first post time. That is a very brief period it seems to me for folks to discover it. Although I do not know the usage patterns, I expect many FW members may just be checking in on the forums they have used in the past and are not necessarily looking for new forums all of the time. I have not found a place on FW where they post a rolling list of any new topics/forums for easy review, say new within the past few days. I just did a search on FW using the word 'investments' in the finance category, - a typical term for a broad search I think, and this thread comes up 13th in the list of the first page - not too bad.
As having discovered FW by virtue of a search on Google using some financial terms, and finding the T-bill thread, I can personally vouch for the significance of search engines in attracting new visitors to FW and threads. And, it takes time for pages to be 'out there' and picked up by the search engine crawlers. So, I would not lose 'heart' at this point in the life of this thread. Give it some time.
As for TIPS - I believe they are much more esoteric instruments to fully understand than T-Bills, T-notes and bonds especially when including the tax facts.
Lastly, re: seeing your name as OP - honestly, I expect your name in that OP role for a financial thread is indeed a definite plus, not a turnoff.
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- mariojm
- Senior Member - 2K
1ofushere, thanks for the encouragement. With my limited experience so far as OP of a few threads, my impression has been that it is "hit" or "miss" right from the start. If you hit it big time from the start, you'll get lots of exposure, and the thread makes it onto the list of 5 finance threads on the FW Forums main page for a couple of days, which gives more exposure, and it'll make it onto the FW 'Today' page with 'hot threads' list, which gives yet more exposure, which encourages lots of posts, which puts the thread near the top of threads in the FW Finance listing of threads, and also near the top for those searching by "view per day" and "highest rating." The many hits leads to high ranking in search engines, which produces yet more hits, and on and on and on. It's a self-perpetuating phenomenon. Essentially, I think with the T-bill thread I just got extremely lucky to have posted the right thing at the right time (in fact I was surprised it wasn't negged into oblivion, I could have sworn I thought all FWers knew about T-bills already).
So, on the other hand, if you "miss" the thread to take off initially, it'll get lost amongst the many new threads, many who may have been interested will never notice it, and it'll have too few hits to be in a significant spot for search engines. So the TIPS thread, this thread, and my long forgotten Teamgeist Ball thread (soccer, anyone? ) have been very humbling experiences for me and shown me how difficult it really is to get the word out on something.
I'm sure some experienced FWers can speak to this much better than I can.
But you might be right, perhaps eventually people will notice ... maybe I need to be more patient and wait for searchers and googlers!
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- ThursdaysChild
- Grumpy Batman
I just took a closer look at the Auction Announcement for the 2- and 5-year Treasury Notes that will be sold this coming week and was surprised to see that the 2-year Notes will be auctioned on Tuesday (the 29th) and the 5-year Notes auctioned on Wednesday (the 30th), although both will be issued on Thursday (the 31st). You can read the announcement here.
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- ThursdaysChild
- Grumpy Batman
mariojm said:Essentially a few times a year, the Treasury reopens an auction ....
Do any of you know why the Treasury does this, reopen previous auctions?
As 1ofushere pointed out, the Institutional section of the TreasuryDirect site has lots of good info, including a section on reopenings (Institutional -> Auction Fundamentals -> How Treasury Auctions Work -> Treasury Reopenings. Although the site describes how reopenings work, it doesn't really say why...
"In a security reopening, the U.S. Treasury issues additional amounts of a previously issued security. The reopened security has the same maturity date and coupon interest rate as the original security, but with a different issue date and usually a different purchase price.
Security Details
The maturity date of the reopening is the same as the maturity date of the original issue.
The coupon rate of the reopening is the same as the coupon rate of the original issue.
The price of the reopened security could be greater than, less than, or equal to the price of the original issue. If the price determined at the reopening exceeds the par value of the security, the purchaser will owe a premium.
Sometimes with a reopened security, the purchaser will have to pay accrued interest. If this is the case, the interest is paid back and included with the first semiannual interest payment."
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- ThursdaysChild
- Grumpy Batman
The regular closing times for the 2-Year Note Auction on Tuesday, 08/29/06
are:
12:00 Noon Eastern Daylight Saving Time for Noncompetitive Tenders
1:00 PM Eastern Daylight Saving Time for Competitive Tenders
This message is an automated mailing from the Bureau of the Public Debt on the following mailing list:
Government Securities Mailing Lists:
Auction Announcement Press Releases
To sign up for mailing lists, visit our mailing list page at:
http://www.treasurydirect.gov/maillist/maillist.htm
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- mariojm
- Senior Member - 2K
Thanks for all the great info, ThursdaysChild!
I'm a little worried that the 2 and 5 year will come in somewhat low at this week's auctions. Within the last two months, it seems like there's been a strong shift of sentiment from trying to slow down an economy to avoiding a recession, and T-note rates dropped a lot in anticipation of rate cuts in 2007.
A couple months ago I had thought of exactly this play, to buy notes (or ETFs investing in notes) when the economic outlook was still good, kind of with a contrarian point of view. Then, wait until rate cuts and see your notes appreciate in value (probably more applicable for a 5-year than 2 year), and sell the note in 2007. Or, equivalently, keep earning a high rate while other, newly issued bonds all earn a low rate.
What I didn't anticipate was that (1) rate hikes would stop "so soon" and (2) even in the weeks before the Fed paused, the market already priced in the pause, and most of the rate cuts that are likely to follow in 2007. I think that by now, most of the shift of sentiment is already priced in, so buying notes at this point would not allow for a lot of upside gain (unless the economy gets a lot worse than expected). I still think the bond market is actually overreacting and we may not be done with fighting inflation just yet; and perhaps in coming months, we might see T-note rates go higher again. *just my speculation/wishful thinking, have no data to support which way rates might go*
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- Shandril
- Frivolous Member
