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)

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.

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.

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 ...

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.

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.

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.

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.

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


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