Treasury Bond

The thirty-year Treasury bond — commonly called the long bond — has served since its reintroduction in 2006 as the defining reference rate for the long end of the United States yield curve, influencing mortgage rates, corporate bond yields, infrastructure financing costs, and the discount rates applied to long-duration liabilities throughout the economy. The Treasury bond's structure, auction mechanics, tax treatment, STRIPS eligibility, and its role in the yield curve are directly tested on the Series 7 examination.

Structure and Basic Characteristics

Treasury bonds are issued with a fixed coupon rate — determined at auction — that remains constant throughout the bond's twenty or thirty year life. 

The coupon is expressed as an annual rate but paid in two equal semi-annual instalments — an investor holding a Treasury bond with a face value of ten thousand dollars and a coupon rate of four percent receives two hundred dollars every six months, or four hundred dollars per year, until the bond matures. 

At maturity the full ten thousand dollar face value is returned in addition to the final semi-annual coupon payment.

Treasury bonds are issued in electronic form only — the last paper format Treasury bonds matured in 2016, completing the transition to fully dematerialised book-entry ownership that began decades earlier. They are issued with a minimum denomination of one hundred dollars in one hundred dollar increments, with no maximum purchase limit for competitive bids subject to the thirty-five percent of offering rule, and a ten million dollar maximum for non-competitive bids at any single auction.

All outstanding Treasury bonds are non-callable — they cannot be redeemed by the Treasury before their stated maturity date regardless of how interest rates change. 

The Treasury ceased issuing callable bonds in 1985 and all callable bonds issued before that date have since matured and been redeemed — so every currently outstanding Treasury bond in the market is a non-callable fixed-maturity instrument. This non-callable feature provides investors with certainty of the bond's cash flow schedule — the semi-annual coupon and the maturity date are fixed and cannot be altered by the Treasury.

The Auction Process — Original Issue and Reopenings

The Treasury Department auctions twenty-year and thirty-year bonds at original issue in February, May, August, and November of each year — four original issue auctions annually for each maturity. In the months between original issue auctions — January, March, April, June, July, September, October, and December — the Treasury reopens previously issued bonds rather than creating entirely new securities. A reopening adds new supply of an existing CUSIP — an existing bond already trading in the secondary market — allowing the Treasury to consolidate its borrowing into fewer, more liquid benchmark issues rather than creating a new bond every month with its own CUSIP.

Like all Treasury marketable securities, bonds are sold through the Bureau of the Fiscal Service's uniform-price Dutch auction — competitive bidders specify the yield they are willing to accept, bids are ranked from the lowest yield to the highest, and all successful bidders pay the same price corresponding to the stop-out yield where the full offering amount is awarded. Non-competitive bidders accept the auction clearing yield and are guaranteed their full requested amount — making the auction accessible to individual investors through TreasuryDirect without the sophistication required to submit a valid competitive bid.

The coupon rate set at the original issue auction is fixed for the bond's entire life — if the auction clearing yield is four and one quarter percent, the coupon rate is set at four and one quarter percent and every subsequent semi-annual payment is calculated at that rate on the face value. In subsequent reopenings, the same coupon rate applies — but the price at which the reopened bonds are issued adjusts to reflect the change in market yields since the original issue, so that the yield to maturity of the reopened bonds matches current market rates even though the coupon rate remains at the original issue level.

Interest Rate Risk — Duration and the Long Bond

Treasury bonds carry the highest interest rate risk of any standard Treasury security because their very long maturities — twenty and thirty years — translate into very high duration — the measure of a bond's price sensitivity to interest rate changes.

Duration measures the weighted average time to receipt of all of a bond's cash flows — coupons and principal — and serves as the primary measure of interest rate risk. A thirty-year Treasury bond with a coupon rate close to the current yield has a duration of approximately eighteen to nineteen years — meaning its price changes by approximately eighteen to nineteen percent for each one percentage point change in yields. A one-percentage-point rise in yields reduces the price of such a bond by approximately eighteen to nineteen percent. A one-percentage-point decline in yields raises the price by a similar amount.

This high duration makes Treasury bonds simultaneously the most volatile and the most potentially rewarding fixed income instruments in the standard Treasury complex — in periods of declining interest rates, long-term Treasury bonds produce extraordinary total returns from price appreciation that dwarf the return available from shorter maturities. In the great bond bull market from 1981 through 2020 — during which the thirty-year Treasury yield fell from approximately fifteen percent to under one percent — investors holding long-duration Treasury bonds captured decades of sustained price appreciation that produced equity-like total returns from a nominally risk-free instrument. Conversely in the 2022 rate-hiking cycle — when the Federal Reserve raised the federal funds rate from near zero to over five percent in approximately eighteen months — thirty-year Treasury bonds suffered price declines exceeding forty percent — among the largest drawdowns ever recorded for a United States government security.

This interest rate risk is the primary risk of Treasury bond investment — not credit risk, which is effectively zero — and the primary consideration for investment advisers evaluating the suitability of Treasury bonds for client portfolios.

STRIPS — Separate Trading of Registered Interest and Principal of Securities

Treasury bonds are eligible for the STRIPS programme — Separate Trading of Registered Interest and Principal of Securities — the mechanism through which broker-dealers or the Treasury itself can separate the individual cash flows of a coupon Treasury bond into individual zero-coupon components, each of which trades independently as a separate security.

A thirty-year Treasury bond has sixty coupon cash flows — one every six months for thirty years — plus a single principal payment at maturity. The STRIPS programme allows each of these sixty-one cash flows to be stripped and traded separately as an individual zero-coupon security whose maturity date corresponds to the date of that specific cash flow. A coupon STRIP maturing in fifteen years is a zero-coupon bond that pays nothing until fifteen years hence when it pays a single cash flow equal to the coupon amount on the face value of the stripped bond. The principal STRIP is a zero-coupon bond maturing at the bond's maturity date that pays the full face value.

STRIPS are created and reconstituted by primary dealers through the Federal Reserve's book-entry system — dealers can strip a coupon Treasury bond by submitting it to the Federal Reserve for separation into its component STRIPS, and can reconstitute a complete bond by assembling the full set of STRIPS corresponding to a specific bond issue. The ability to both create and reconstitute STRIPS through arbitrage ensures that STRIPS prices remain consistent with the prices of the coupon bonds from which they derive.

STRIPS serve the specific investment needs of pension funds, insurance companies, and other investors seeking zero-coupon cash flows matching specific future liability payment dates — particularly for liability-driven investing strategies where the investor wants to immunise a portfolio of known future obligations by holding zero-coupon instruments maturing on the obligation dates. Because STRIPS pay no interim cash flows there is no reinvestment risk — the investor knows with certainty the dollar amount they will receive on the maturity date.

The tax treatment of STRIPS involves phantom income — the annual accrual of imputed interest that is taxable as ordinary income in the year it accrues even though no cash is received. STRIPS holders pay federal income tax each year on the difference between the beginning-of-year and end-of-year accreted values even though no coupon is paid — making STRIPS generally unsuitable for taxable accounts and most appropriate for tax-deferred retirement accounts where the annual phantom income accrual creates no current tax liability.

Tax Treatment — The State and Local Exemption

Like all Treasury securities Treasury bond interest income is subject to federal income tax but exempt from state and local income taxes under 31 U.S.C. 3124 — the same intergovernmental immunity doctrine that applies to Treasury bill interest. This state and local tax exemption makes Treasury bonds more attractive than comparable taxable corporate bonds for investors in high-income-tax states on an after-tax yield comparison basis.

For a California resident in the thirty-seven percent federal and thirteen point three percent California state income tax bracket — a combined marginal rate of fifty point three percent on ordinary income — the after-tax yield advantage of a Treasury bond over a corporate bond of similar maturity requires adjusting the Treasury yield upward by the state tax rate to produce the comparable taxable yield. A four percent Treasury bond yield is equivalent to approximately four point six percent taxable on a state-tax-adjusted basis for this California investor — the state exemption adds sixty basis points of after-tax yield advantage over a taxable corporate bond.

Treasury Bonds Versus Treasury Notes — The Key Distinctions

The Series 7 examination directly tests the distinctions among Treasury bills, notes, and bonds — and between notes and bonds specifically the distinction is maturity range.

Treasury notes have original maturities of two, three, five, seven, and ten years — covered in the following entry of this dictionary. Treasury bonds have original maturities of twenty and thirty years. Both pay semi-annual coupon interest at a fixed rate and return face value at maturity — the structural payment mechanism is identical. The only definitional difference is the maturity range — instruments at ten years or below are notes, instruments at twenty years and thirty years are bonds.

In the secondary market both Treasury notes and bonds trade as conventional coupon bonds with prices quoted as a percentage of face value in thirty-seconds of a point — so a price of ninety-eight and sixteen thirty-seconds is expressed as ninety-eight and one-half — and both are subject to the same yield-to-maturity calculation and price-yield mathematics that govern all coupon bonds. The longer maturity of Treasury bonds produces higher duration and therefore greater price sensitivity to interest rate changes — this is the primary practical distinction between the two categories in portfolio management and risk analysis.

The Thirty-Year Bond and the Yield Curve

The thirty-year Treasury bond yield — the long bond yield — is among the most closely watched reference rates in all of global finance because it serves as the benchmark for the long end of the United States yield curve and influences the pricing of financial instruments and economic decisions across the entire economy.

Mortgage rates are heavily influenced by the ten-year Treasury note yield — but very long fixed-rate mortgages and the pricing of mortgage-backed securities reference the long bond. Corporate bonds with maturities of twenty and thirty years are priced as spreads above the comparable Treasury bond yield — the credit spread over Treasuries for long-maturity investment grade corporates and high yield bonds directly reflects the long bond yield as the base. Infrastructure project financing — for toll roads, power plants, airports, and other long-lived assets — references the thirty-year Treasury yield as the risk-free component of the financing cost.

Pension fund liability discount rates — the rates at which defined benefit pension obligations are discounted to determine the present value of future benefit payments — are closely linked to long-term Treasury and corporate bond yields. When Treasury bond yields fall, pension liability present values rise — increasing the funding gap that sponsors must address. When Treasury bond yields rise, pension liability present values fall — improving funding status. This direct mathematical relationship between Treasury bond yields and pension fund balance sheets makes pension funds among the most significant buyers of long-term Treasury bonds in normal market conditions.

Examination Relevance and Key Takeaways

Treasury bonds are tested on the Series 7 examination in the context of government securities, the distinction from Treasury notes and bills, interest rate risk and duration, the STRIPS programme, and tax treatment.

The key points to retain are these.

A Treasury bond is a long-term United States government debt obligation with original maturity of twenty or thirty years — the longest standard maturity in the Treasury marketable securities framework. T-bonds pay a fixed coupon rate semi-annually throughout their lives and return the full face value at maturity — they are coupon instruments unlike the discount Treasury bill. The minimum denomination is one hundred dollars. All currently outstanding Treasury bonds are non-callable — the Treasury ceased issuing callable bonds in 1985 and all pre-1985 callable bonds have matured. Twenty-year and thirty-year bonds are auctioned at original issue in February, May, August, and November — reopened in the remaining months to consolidate borrowing into liquid benchmark issues.

Treasury bonds carry the highest interest rate risk of any standard Treasury security because their very long maturities produce very high duration — approximately eighteen to nineteen years for a thirty-year bond — meaning their prices change by approximately eighteen to nineteen percent for each one percentage point change in yields. Treasury bonds are eligible for the STRIPS programme — coupon and principal components can be stripped and traded separately as individual zero-coupon securities serving pension fund and insurance company liability-matching needs. STRIPS generate phantom income — annual imputed interest taxable as ordinary income in the year it accrues even though no cash is received — making them generally inappropriate for taxable accounts. Treasury bond interest is subject to federal income tax and exempt from state and local income taxes under 31 U.S.C. 3124 — the same exemption applying to all Treasury securities. The key examination distinction from Treasury notes is maturity — notes mature in two through ten years, bonds mature in twenty or thirty years — both pay semi-annual coupon interest and face value at maturity.