Treasury Bonds Explained: T-Bills, T-Notes, T-Bonds, Yields, and How They Affect Stocks

When investors talk about the risk-free rate, the bond market, or rising yields crushing stock valuations, they are almost always talking about U.S. Treasury securities. Understanding how Treasuries work is foundational to understanding equity markets, interest rates, and the overall cost of capital that flows through every discounted cash flow model.

This guide covers everything retail investors need to know: the four types of Treasury securities, how yields are calculated, why price and yield move in opposite directions, and why the 10-year Treasury yield is one of the most watched numbers in global finance.

What Are Treasury Bonds?

Treasury securities are debt instruments issued by the U.S. Department of the Treasury to finance government spending. When the government needs to borrow money, it sells these securities to investors, promising to pay back the face value at maturity along with regular interest payments in most cases.

Because they are backed by the full faith and credit of the U.S. government, Treasury securities are considered the closest thing to a risk-free investment available in U.S. dollar-denominated markets. This is why they serve as the baseline rate against which all other assets are measured.

There are four main categories of Treasury securities, each distinguished by its maturity and how it pays interest.

The Four Types: T-Bills, T-Notes, T-Bonds, and TIPS

T-Bills (Treasury Bills): Under 1 Year

T-Bills are short-term securities with maturities ranging from four weeks to 52 weeks. They do not pay periodic interest (coupons). Instead, they are sold at a discount to face value and pay the full face value at maturity.

For example, an investor might pay $980 for a T-Bill with a $1,000 face value maturing in six months. The $20 difference is the investor's return. This is called a discount basis pricing structure.

Because T-Bills have very short maturities, they are highly sensitive to Federal Reserve policy. When the Fed raises its overnight rate, T-Bill yields tend to move up quickly. T-Bills are widely used as a cash equivalent by institutional investors, money market funds, and corporations that need to park capital safely for short periods.

T-Notes (Treasury Notes): 2 to 10 Years

T-Notes are medium-term securities with maturities of 2, 3, 5, 7, or 10 years. Unlike T-Bills, T-Notes pay a fixed coupon interest rate every six months based on the face value. At maturity, the investor receives the face value back.

If you own a $10,000 T-Note with a 4% coupon rate, you receive $200 every six months (4% of $10,000 divided by two), plus the $10,000 principal at maturity.

The 10-year Treasury note is the most widely cited benchmark in global finance. Its yield is used to price mortgage rates, corporate bonds, and to set the discount rate in stock valuation models.

T-Bonds (Treasury Bonds): 20 to 30 Years

T-Bonds are long-term securities with maturities of 20 or 30 years. Like T-Notes, they pay a semiannual coupon based on the face value and return the principal at maturity.

Because T-Bonds have the longest maturities, they carry the most duration risk. Their prices are highly sensitive to changes in interest rates. A small move in yields can cause a large change in price for a 30-year bond. Long-duration T-Bonds are typically held by pension funds, insurance companies, and institutional investors with matching long-term liabilities.

TIPS (Treasury Inflation-Protected Securities)

TIPS are a special category of Treasury securities designed to protect investors from inflation. The principal value of a TIPS security adjusts with changes in the Consumer Price Index (CPI). If inflation rises, the principal increases; if deflation occurs, the principal decreases.

TIPS pay a fixed coupon rate, but because that rate is applied to an inflation-adjusted principal, the actual dollar interest payments fluctuate over time. At maturity, investors receive the greater of the adjusted or original principal.

TIPS are used to measure the market's inflation expectations. The difference between a standard Treasury yield and a TIPS yield of the same maturity is called the breakeven inflation rate, and it reflects what the market expects inflation to average over that period.

Key Concepts: Face Value, Coupon Rate, Current Yield, and Yield to Maturity

To understand Treasuries, four terms matter most.

Face Value

The face value (also called par value) is the amount the government promises to repay at maturity. For most Treasuries, this is $1,000, though the minimum purchase on TreasuryDirect.gov is $100. The coupon interest payments are calculated as a percentage of face value.

Coupon Rate

The coupon rate is the fixed annual interest rate set at the time of issuance, expressed as a percentage of face value. If a T-Note has a 4.5% coupon rate and a $1,000 face value, the annual interest paid is $45, split into two $22.50 payments.

The coupon rate never changes after issuance. This is important because it creates a mismatch over time when market interest rates move.

Current Yield

The current yield is the annual coupon payment divided by the bond's current market price. If the same 4.5% coupon bond is now trading at $950 because interest rates rose, the current yield is $45 divided by $950, which equals about 4.74%.

Current yield gives a quick snapshot of the return relative to today's price, but it does not account for the gain or loss at maturity.

Yield to Maturity

Yield to maturity (YTM) is the most comprehensive yield measure. It accounts for the coupon payments, the current market price, and the difference between the price paid and the face value received at maturity. YTM is the annualized return an investor earns if they hold the bond until it matures.

When analysts quote the 10-year Treasury yield in news headlines, they are almost always referencing yield to maturity.

Why Price and Yield Move in Opposite Directions

This is the concept that trips up most new investors, but it follows directly from basic math.

Imagine you hold a T-Note with a 3% coupon rate paying $30 per year on a $1,000 face value. Now suppose new T-Notes come to market paying 5% coupons. No investor would pay $1,000 for your 3% note when they can get 5% on a new one. To sell your bond, you would have to lower the price until the yield becomes competitive.

If you dropped the price to roughly $800, the $30 coupon would represent about a 3.75% current yield, plus the buyer would gain $200 when the bond matures at $1,000. The combined return approaches the 5% available on new bonds. The price fell to bring the yield up.

The reverse is also true. When rates fall, existing bonds with higher coupons become valuable, so their prices rise and their yields drop.

This inverse relationship is mechanical and always holds: when yields rise, bond prices fall; when yields fall, bond prices rise.

The 10-Year Treasury Yield: The Benchmark Risk-Free Rate

The 10-year Treasury yield is the most important single number in finance. It serves as the baseline risk-free rate used in virtually every asset pricing model.

In a discounted cash flow (DCF) model, future cash flows are discounted back to present value using a discount rate. That discount rate typically starts with the risk-free rate, which is the 10-year Treasury yield. A higher risk-free rate means a higher discount rate, which means future cash flows are worth less today.

This is why stock valuations, particularly for growth companies with earnings projected far into the future, are so sensitive to changes in the 10-year yield. A stock that looks fairly valued with a 3.5% discount rate baseline can look expensive when the 10-year rises to 5%, because all those future earnings get discounted more heavily.

How Rising Treasury Yields Compress Equity Valuations

The mechanism linking Treasury yields to stock prices runs through several channels.

The Discount Rate Effect

As described above, rising yields increase the discount rate in valuation models. For a high-growth company with most of its value in earnings 5 to 15 years out, a one percentage point increase in the discount rate can reduce the present value of those future earnings by 15 to 25%. This is why long-duration growth stocks fell sharply in 2022 when the 10-year yield jumped from below 2% to above 4%.

Value stocks with near-term earnings are less sensitive because their cash flows are not as far in the future.

The Earnings Yield Comparison

Investors constantly compare the earnings yield on stocks (earnings per share divided by stock price) against Treasury yields. When 10-year Treasuries yield 5%, a safe, guaranteed 5% return competes directly with risky equity returns. If the S&P 500 earnings yield is only 4.5%, investors may reduce equity exposure in favor of Treasuries.

This comparison is sometimes called the equity risk premium framework. The equity risk premium is the extra return investors demand to hold stocks over risk-free bonds. When bond yields rise, the math requires either lower stock prices or higher corporate earnings to restore an acceptable premium.

The Borrowing Cost Channel

Higher Treasury yields push up corporate borrowing costs across the board. Companies that rely on cheap debt to fund growth or buybacks face higher interest expenses, which reduces earnings. Capital-intensive businesses feel this most acutely.

The Fed Funds Rate vs. the 10-Year Yield

A common misconception is that the Federal Reserve controls the 10-year Treasury yield. It does not, at least not directly.

The Fed controls the federal funds rate, which is the overnight rate at which banks lend to each other. This rate influences short-term yields, including T-Bill yields, very closely. When the Fed raises rates, T-Bill yields almost always follow immediately.

The 10-year yield is set by the bond market through supply and demand. It reflects market expectations for inflation, economic growth, and future Fed policy over the next decade. The 10-year can move independently from the Fed funds rate, and sometimes in the opposite direction.

When the Fed funds rate is higher than the 10-year yield, the yield curve is said to be inverted. This has historically preceded recessions and is watched closely by economists and investors.

The Treasury Auction Process

The U.S. government sells Treasuries through regular auctions conducted by the Treasury Department. For example, 10-year T-Notes are auctioned monthly. Institutional investors, foreign governments, and individuals submit bids for a certain yield. The government accepts bids from lowest yield to highest yield until the full amount is sold.

The clearing yield (the highest yield accepted) becomes the coupon rate for that issuance. After the auction, the bonds trade in the secondary market, where prices and yields fluctuate constantly based on economic data, Fed communications, and global demand.

The secondary market for Treasuries is the largest and most liquid bond market in the world, with trillions of dollars traded daily.

Who Buys Treasuries?

The buyer base for U.S. Treasuries is global and diverse. Foreign governments and central banks hold large amounts as foreign exchange reserves, with Japan and China historically being the largest foreign holders. U.S. commercial banks and insurance companies hold Treasuries for capital management and regulatory purposes. The Federal Reserve itself holds Treasuries as part of monetary policy operations. Mutual funds, ETFs, and individual investors access Treasuries through TreasuryDirect.gov or brokerages.

This global demand creates a natural floor under Treasury prices, but it also means that shifts in foreign demand or global risk sentiment can move yields even without any change in U.S. economic data.

Historical 10-Year Yield Range

To put current yields in context, a quick historical survey is useful.

During World War II, the 10-year yield was held artificially low, below 2.5%, as part of government financing strategy. Through the 1950s and 1960s, yields gradually rose. The high-inflation era of the late 1970s and early 1980s pushed the 10-year yield to a peak near 16% in 1981.

The 40 years from 1981 to 2021 were characterized by a long, secular decline in yields. By 2020, the 10-year had fallen below 1% as the Federal Reserve held rates near zero during the pandemic. This long decline was a powerful tailwind for both bond prices and equity valuations.

The 2022 rate cycle reversed this trend sharply. The 10-year rose from below 1.5% at the start of 2022 to above 4.9% by late 2023, the fastest rate increase in decades. This caused major losses in long-duration bond portfolios and was a primary driver of the equity bear market in 2022.

The Equity/Bond Correlation Breakdown in 2022

For most of the two decades before 2022, stocks and bonds had a reliable negative correlation: when stocks sold off, bond prices rose (yields fell) as investors fled to safety. This made Treasuries an effective hedge in a traditional 60/40 portfolio.

In 2022, both stocks and bonds fell simultaneously. The S&P 500 fell roughly 18% for the year, and long-duration Treasury bonds fell 25% to 30% as yields surged. This correlation breakdown was the worst combined loss for the 60/40 portfolio since the stagflation era of the 1970s.

The breakdown happened because 2022 was driven by inflation, not recession. In a typical recession, the Fed cuts rates and bonds rally as investors seek safety. In an inflation-driven selloff, the Fed must raise rates aggressively, which crushes both bonds (rising yields hurt prices) and stocks (higher discount rates compress valuations).

This episode reminded investors that the stock/bond correlation is not fixed. When inflation is the dominant risk, bonds may not provide the protection investors assume.

Practical Ways Retail Investors Use Treasuries

Retail investors interact with Treasury yields and securities in several practical ways.

Yield monitoring matters for valuation work. When screening for undervalued stocks, the risk-free rate determines what discount rate you plug into a DCF. If the 10-year is at 4.5%, a stock needs to justify its price against a very different hurdle rate than when the 10-year was at 1.5%.

For capital allocation, short-term T-Bills have been an attractive cash-equivalent alternative when yields are meaningfully positive. Parking idle capital in a 5% T-Bill while waiting for better equity opportunities is a legitimate strategy that retail investors can execute through most brokerages or directly through TreasuryDirect.gov.

Understanding the yield curve helps investors assess the macro backdrop. A steeply inverted yield curve (short rates above long rates) has historically corresponded to periods of economic stress, which tends to affect cyclical equities differently than defensive sectors.

How Equity Rank Uses the Risk-Free Rate

Equity Rank's valuation engine uses the current 10-year Treasury yield as the baseline for DCF discount rate calculations across all stocks. When the model calculates a projected fair value range, that calculation incorporates the prevailing risk-free rate along with an equity risk premium appropriate to the stock's characteristics.

This means the fair value estimate on any given stock on the platform is sensitive to the current yield environment. A stock might show a different model fair value differential above current price at a 3% 10-year versus a 5% 10-year, even if the company's fundamentals have not changed at all. Tracking the 10-year yield is not just a macroeconomic exercise: it directly shapes every valuation output the platform generates.

Self-directed investors who understand this connection are better equipped to interpret model outputs and contextualize why fair value estimates shift over time, even when earnings estimates hold steady.

Summary

Treasury securities form the backbone of global fixed income markets and set the risk-free rate that underpins virtually every stock valuation. T-Bills, T-Notes, T-Bonds, and TIPS each serve a different purpose in the capital markets and attract different types of buyers. The central mechanics are straightforward: coupon payments are fixed, prices and yields move inversely, and the 10-year yield functions as the single most important rate benchmark for pricing equities.

When the 10-year yield rises, discount rates increase, future earnings are worth less today, and equity valuations face downward pressure, especially for long-duration growth stocks. When yields fall, the reverse is true. Understanding this relationship is not optional for investors who want to understand why markets move.

The 10-year Treasury yield is free data, updated in real time, and it belongs in every investor's daily awareness alongside price-to-earnings ratios, earnings growth, and sector fundamentals.