Types of Government Securities: T-Bills, TIPS, and Municipal Bonds

The main types of government securities are Treasury bills, Treasury notes, Treasury bonds, Treasury Inflation-Protected Securities (TIPS), Floating Rate Notes, Treasury STRIPS, U.S. savings bonds (Series EE and Series I), municipal bonds, and agency securities issued by federal agencies and Government-Sponsored Enterprises. They differ along four axes that decide which one belongs in your portfolio: how long until you get your money back, how the interest is paid, who stands behind the debt, and how the return is taxed.

How Government Securities Work

A government security is a debt instrument. A government entity needs money, issues a security that promises to pay back the principal on a future date, and usually pays interest along the way. Each security spells out three things: the face value you receive at maturity, the interest rate or discount, and the maturity date.

Different issuers carry different levels of credit risk. Federal Treasury debt sits at the top of the safety hierarchy because it’s backed by the full faith and credit of the United States government. Municipal bonds issued by cities and states carry somewhat more credit risk. Government-Sponsored Enterprises like Fannie Mae fall somewhere in between, with an implied but not explicit guarantee on most of their debt. That risk difference shows up in yields: an issuer with higher perceived credit risk has to offer a better interest rate to attract your money.

The U.S. Treasury alone has over $27 trillion in outstanding marketable debt, which is why these instruments anchor the global bond market.

Treasury Bills

Treasury bills are the shortest-term securities the federal government issues, with maturities of 4, 6, 8, 13, 17, 26, and 52 weeks.¹ T-bills don’t pay interest during their term. You buy them at a discount and receive the full face value at maturity. Pay $9,850 for a $10,000 bill, and that $150 difference is your return.

The minimum purchase is $100, in $100 increments.² Because of their short duration and high liquidity, T-bills work as cash-management tools for investors who want a safe place to park money they’ll need soon.

Treasury Notes

Treasury notes cover the middle of the maturity spectrum, issued in terms of 2, 3, 5, 7, or 10 years.³ Notes pay a fixed interest rate every six months until they mature. That coupon rate is locked in at auction and never changes.

The 10-year note gets outsized attention because it serves as the benchmark rate for many financial products, including fixed-rate mortgages. When you hear that “rates are rising,” it’s often the 10-year yield people are watching. Notes do carry more interest rate risk than bills. If market rates climb after you buy, the resale value of your existing note drops because newer notes offer better rates.

Treasury Bonds

Treasury bonds are the longest-dated securities the government offers, issued in 20-year and 30-year terms.² Like notes, they pay interest every six months. The 30-year bond, often called the “long bond,” is a key indicator of where the market thinks long-term interest rates are heading.

The trade-off with bonds is duration risk. A small shift in market interest rates causes a much larger price swing on a 30-year bond than on a 5-year note. If you buy a 30-year bond yielding 4.5% and rates jump to 5.5%, the market price of your bond falls significantly. That only matters if you sell before maturity. Hold to the end and you get your full face value back.

Treasury Inflation-Protected Securities (TIPS)

TIPS shield your purchasing power from inflation. They come in 5-year, 10-year, and 30-year terms and pay a fixed coupon rate every six months, just like regular notes and bonds.⁴ The difference is that the principal adjusts based on changes in the Consumer Price Index. When inflation rises, your principal goes up, and since the coupon is calculated on that adjusted principal, your interest payments grow too.

At maturity, you receive either the inflation-adjusted principal or the original face value, whichever is greater. That floor protects you against a deflationary scenario wiping out your investment.

The catch is phantom income. The IRS treats the annual increase in your TIPS principal as taxable income in the year it accrues, even though you don’t receive that money until maturity.⁴ You owe taxes on gains you haven’t pocketed. For this reason, many investors hold TIPS in tax-advantaged accounts like IRAs where the phantom income issue disappears.

Floating Rate Notes

Floating Rate Notes are a newer addition to the Treasury lineup, maturing in two years. Their interest rate isn’t fixed. It resets weekly based on the most recent 13-week T-bill auction rate, plus a fixed spread determined at the original auction.⁵ Interest accrues daily and is paid quarterly.

FRNs suit investors who want to stay in government-backed debt without locking into a fixed rate. When short-term rates rise, FRN yields climb with them, avoiding the price declines that hit fixed-rate notes and bonds. The flip side: if rates fall, your income drops.

Treasury STRIPS

STRIPS, or Separate Trading of Registered Interest and Principal of Securities, take a regular Treasury note or bond and break it into individual pieces. A 10-year note with 20 remaining semi-annual interest payments becomes 21 separate zero-coupon securities: one for each interest payment date and one for the principal.⁶ Each piece trades on its own and pays nothing until its specific maturity date, when you receive its face value.

You can’t buy STRIPS through TreasuryDirect. They’re only available through brokers and dealers in the commercial book-entry system, with a minimum face amount of $100.⁶ They’re useful for locking in a specific payout on a specific date, which is why retirement planners use them to match future income needs with a guaranteed payment. Like TIPS, STRIPS generate phantom income: the IRS taxes the annual accretion in value even though you receive no cash until maturity.

Savings Bonds: Series EE and Series I

Savings bonds are non-marketable government securities. You can’t sell them to another investor on the secondary market. You buy them directly from TreasuryDirect and redeem them with the Treasury when you’re ready.

Series EE Bonds

EE bonds earn a fixed interest rate set at the time of purchase, currently 2.50% for bonds issued through April 2026. That rate alone isn’t eye-catching, but EE bonds come with a guarantee that the Treasury will double the bond’s value at the 20-year mark, even if the accrued interest hasn’t gotten it there.⁷ That doubling effectively guarantees a return equivalent to about 3.5% annualized if you hold the full 20 years. After that, the bond continues earning its stated fixed rate for another 10 years, maxing out at a total 30-year term.

Series I Bonds

I bonds combine a fixed rate with a variable inflation rate that adjusts every six months based on the Consumer Price Index. The composite rate for I bonds issued from November 2025 through April 2026 is 4.03%, calculated from a 0.90% fixed rate and a 1.56% semiannual inflation rate.⁸ The fixed rate stays the same for the life of the bond, while the inflation component resets each May and November.

I bonds can’t lose value due to deflation. If the inflation adjustment turns negative, it can reduce the composite rate but never below zero, so your principal won’t shrink.

Purchase Limits and Early Redemption

You can buy up to $10,000 in electronic EE bonds and $10,000 in electronic I bonds per Social Security Number each calendar year.⁹ Gift bonds count toward the recipient’s limit, not yours, and minor children with linked TreasuryDirect accounts have their own separate limits.

Both EE and I bonds require a minimum one-year holding period. You simply cannot cash them before 12 months. If you redeem either type before five years, you forfeit the last three months of earned interest.¹⁰ After five years, no penalty applies. This makes savings bonds a poor choice for money you might need in the next year, but a reasonable one for medium-term savings.

Municipal Bonds

Municipal bonds are issued by state and local governments, cities, counties, and special districts to fund public projects like schools, roads, and water systems. They come in two main varieties based on how they’re repaid.

General obligation bonds are backed by the issuing government’s taxing power. The municipality pledges its ability to raise property taxes, sales taxes, or other revenues to make payments. Revenue bonds depend on income from a specific project: tolls from a highway, fees from a water utility, or rent from a public facility. If that project underperforms, bondholders bear the risk. Revenue bonds generally carry higher yields to compensate for that added uncertainty.

Municipal defaults are rare but not impossible. Investment-grade munis have historically defaulted at a fraction of the rate of similarly rated corporate bonds, which is part of why they can offer lower pre-tax yields while still attracting investors. Rating agencies assess each issuer’s financial health, and a downgrade can cause a bond’s market price to drop well before any actual default.

The Tax-Equivalent Yield Advantage

The biggest draw for municipal bonds is their tax treatment. Interest on most munis is exempt from federal income tax under federal law.¹¹ If you buy a bond issued within your state of residence, the interest is typically exempt from state and local income taxes too, the so-called double exemption.

This exemption means a muni bond yielding 3.5% can actually beat a Treasury or corporate bond yielding 5% for someone in a high tax bracket. The comparison formula is simple: divide the muni yield by one minus your marginal tax rate. If you’re in the 35% federal bracket, a 3.5% muni yield is equivalent to about 5.38% from a taxable bond (3.5 ÷ 0.65). The higher your tax rate, the more valuable the exemption becomes.

One exception worth knowing: private activity bonds, where more than 10% of the bond proceeds benefit a private business, may lose some of their tax advantages.¹² Interest on certain private activity bonds can trigger the Alternative Minimum Tax.

Agency Securities

Agency securities are issued by federal agencies and Government-Sponsored Enterprises (GSEs), privately owned corporations chartered by Congress to support specific lending markets. The most prominent GSEs are Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, all of which focus on housing finance.

A distinction that trips up many investors: most GSE debt does not carry the full faith and credit of the U.S. government. Fannie Mae and Freddie Mac have operated under federal conservatorship since the 2008 financial crisis, and the government has provided direct financial support, but Congress has never explicitly guaranteed their obligations. The market treats them as having an implied guarantee, and they’ve always paid, but the legal distinction matters.

Securities issued by the Government National Mortgage Association (Ginnie Mae) are the exception. Ginnie Mae mortgage-backed securities do carry the full faith and credit guarantee of the United States.¹³ That makes Ginnie Mae debt nearly equivalent to Treasury obligations in terms of credit risk, though it carries prepayment risk that Treasuries don’t. Homeowners can refinance, returning your principal earlier than expected.

Agency securities generally yield a bit more than comparable Treasuries to compensate for their slightly higher risk profile and lower liquidity.

How Tax Treatment Differs Across Types

Tax rules vary sharply depending on who issued the security, and picking the wrong type can shrink your take-home yield. A lower-yielding bond with favorable tax treatment can put more money in your pocket than a higher-yielding alternative.

Interest from Treasury bills, notes, bonds, TIPS, and FRNs is subject to federal income tax but exempt from all state and local income taxes. In states with high income tax rates, that exemption is valuable. Your financial institution reports the interest on Form 1099-INT each year.¹⁴ For T-bills, the “interest” is the discount you received at purchase. For TIPS and STRIPS, the annual increase in principal or accreted value is taxable each year, even though no cash changes hands until maturity.⁶

Most municipal bond interest is exempt from federal income tax, and bonds purchased from issuers in your home state are usually exempt from state and local taxes as well.¹¹ Exceptions exist for private activity bonds and arbitrage bonds, where part or all of the interest may be taxable.¹²

One rule applies to every type: if you sell any government security before maturity for more than your adjusted cost basis, the profit is a taxable capital gain, regardless of whether the interest itself was tax-exempt. Even a muni bond producing tax-free coupon income will generate a fully taxable gain if you sell it at a profit before maturity.

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TreasuryDirect. Treasury Bills
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TreasuryDirect. Treasury Bonds
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TreasuryDirect. Treasury Notes
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TreasuryDirect. Treasury Inflation-Protected Securities (TIPS)
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TreasuryDirect. Floating Rate Notes (FRNs)
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TreasuryDirect. Separate Trading of Registered Interest and Principal of Securities (STRIPS)
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TreasuryDirect. EE Bonds
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TreasuryDirect. I Bonds Interest Rates
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TreasuryDirect. How Much Can I Spend/Own?
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TreasuryDirect. Cash EE or I Savings Bonds
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Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds
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Office of the Law Revision Counsel. 26 USC 141 – Private Activity Bond; Qualified Bond
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Ginnie Mae. Funding Government Lending
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Internal Revenue Service. Topic No. 403 – Interest Received