The choice between corporate bonds and Treasury bonds turns on a single question: who owes you the money. Treasuries are backed by the U.S. government’s power to tax and issue currency, so credit risk is effectively zero. Corporate bonds are backed only by a company’s ability to keep paying, so they yield more to compensate you for the chance it can’t. Every other difference, from taxes to how easily you can sell, follows from that.
Who You’re Lending To
Treasury bonds are issued by the U.S. Department of the Treasury through its Bureau of the Fiscal Service in 20-year and 30-year maturities.1U.S. Department of the Treasury. Bonds and Securities The repayment promise is the “full faith and credit” of the United States, which in practice means the government would raise taxes or issue new debt before missing a payment. That backing is why Treasuries function as the global benchmark for a risk-free investment.
Corporate bonds are issued by companies raising capital without diluting shareholders. Repayment depends on the company’s revenue, cash flow, and assets. Some issues are secured by specific collateral like equipment or real estate; others are unsecured and rely on the company’s general creditworthiness. Either way, no government guarantee stands behind the contract.
How Much More Corporate Bonds Pay
The extra yield you get on a corporate bond over a Treasury of the same maturity is the “yield spread,” and it’s the price of taking on credit risk. Credit rating agencies grade that risk with letter scales. Anything rated Baa3 (Moody’s) or BBB- (S&P, Fitch) and above is “investment grade.”2The Association of Corporate Treasurers. Corporate Credit Ratings – A Quick Guide Everything below that line is “high-yield” or “junk.”
Default data shows why the spread widens as ratings fall. In 2025, S&P recorded a 0.00% annual default rate for investment-grade issuers, 0.08% at BB, 1.18% at B, and 25.90% at CCC/C.3S&P Global Ratings. 2025 Annual Global Corporate Default and Rating Transition Study With the 10-year Treasury yielding roughly 4.3% in early 2026, a high-quality investment-grade corporate bond might yield around 5.0% to 5.5%, a spread of 70 to 120 basis points. High-yield spreads run wider. In late 2024, the average high-yield spread sat around 270 basis points, well below the 20-year average near 490. Tight spreads mean the market sees low default risk, but they also mean you’re getting less extra pay for taking that risk.
Spreads move with the economy. In recessions and financial crises, investors flee to Treasuries and dump corporate bonds, pushing spreads wider. In expansions, spreads compress.
Tax Treatment
This is where Treasuries have a structural advantage that gets overlooked. Corporate bond interest is taxed at the federal, state, and local level as ordinary income. Treasury interest is subject to federal income tax but exempt from all state and local income taxes,4Internal Revenue Service. Topic No. 403, Interest Received an exemption set by federal statute.5Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation
The exemption changes what looks like a fair comparison. Top marginal state rates range from zero in Texas and Florida to over 13% in California. For an investor in a state with a combined state and local rate of 8%, a Treasury yielding 4.3% is equivalent to a corporate bond yielding roughly 4.67% after accounting for the state tax savings. A corporate spread that looked generous shrinks once the state tax bite is priced in. If you live in a high-tax state, run the tax-equivalent yield before assuming the higher headline number wins.
The Call Problem With Corporate Bonds
Most corporate bonds include a call provision that lets the issuer redeem the bond before maturity, usually at par or a small premium. Investment-grade issues are typically callable at $1,000 par. Many high-yield bonds start with a call price above par that steps down each year on a schedule set in the prospectus. Most callable bonds carry at least a few months of call protection after issuance.
Calls work against you. Companies call bonds when rates fall, which is exactly when you’d most want to keep collecting the above-market coupon. You get your principal back and have to reinvest at lower prevailing rates. Modern Treasury bonds, meaning those issued since 1985, are not callable. Buy a 30-year Treasury and the coupon is locked in for 30 years no matter where rates go.
Selling Before Maturity
If you might need to sell before the bond matures, liquidity matters. The U.S. Treasury market is the deepest securities market on earth, with average daily trading volume around $1.2 trillion in early 2026.6SIFMA. US Treasury Securities Statistics You can move large positions quickly at tight bid-ask spreads with minimal price impact.
Corporate bonds trade in a different world. Most transactions happen over-the-counter through a decentralized dealer network rather than a centralized exchange. Liquidity varies enormously by issue. A recently issued investment-grade bond from a large company trades reasonably well. A smaller, older, or lower-rated issue can be genuinely illiquid, meaning you may struggle to find a buyer quickly or have to accept a lower price to exit. Bid-ask spreads on corporate bonds run wider than on Treasuries even in the best cases.
What Happens if Things Go Wrong
Treasury bonds have never had a payment default, so this question is really about corporate bonds. When a company enters bankruptcy, federal law sets the payment order. Secured creditors are paid first. Unsecured creditors, including most bondholders, come next. Stockholders come last, and only if anything is left.7Office of the Law Revision Counsel. 11 US Code 1129 – Confirmation of Plan
Priority over stockholders does not mean full recovery. The long-term historical average recovery rate on senior unsecured bonds is about 38 cents on the dollar.8Moody’s. Corporate Default and Recovery Rates 1920-2006 Recoveries are higher in healthy economies and lower during recessions, when defaults cluster and distressed assets lose value together. Secured bonds recover more; subordinated bonds recover less. When corporate defaults do hit, the losses are severe, which is why diversifying across many issuers matters more with corporate bonds than with Treasuries.
Inflation Protection
Standard fixed-rate bonds, whether corporate or Treasury, pay a set dollar amount. If inflation runs hotter than expected, the purchasing power of those payments erodes. Treasury Inflation-Protected Securities (TIPS) address this directly. They come in 5-, 10-, and 30-year terms. The coupon rate is fixed at auction, but the principal adjusts every six months based on the Consumer Price Index for Urban Consumers (CPI-U), so interest payments rise with inflation. At maturity you receive the greater of the inflation-adjusted principal or the original face value.9TreasuryDirect. Treasury Inflation-Protected Securities (TIPS)
No comparable inflation-linked product exists in the corporate bond market. If protecting purchasing power is the goal, TIPS are the only mainstream option, and they carry the same government backing as regular Treasuries.
How To Buy Each
Treasury bonds can be purchased directly from the government through TreasuryDirect.gov with a $100 minimum in $100 increments, at no commission.10TreasuryDirect. Treasury Bonds They also trade on the secondary market through any brokerage, and most brokers charge no commission on Treasury trades. TIPS are available on TreasuryDirect at the same $100 minimum.9TreasuryDirect. Treasury Inflation-Protected Securities (TIPS)
Corporate bonds are bought almost exclusively through brokerage accounts. Standard face value is $1,000 per bond. Many brokers will let you buy one or two, but some issues have higher minimums, particularly institutional-grade debt trading in blocks of $100,000 or $250,000. For broad corporate exposure without picking individual issues, corporate bond ETFs and mutual funds offer diversified access at much lower minimums and with better liquidity than most single bonds.
Which One Fits Your Portfolio
What you need the bond allocation to do drives the answer. If the job is capital preservation, liquidity, and predictable income with no credit risk, Treasuries are the obvious choice, and the state and local tax exemption tilts the math further in their favor if you live in a high-tax state. TIPS handle inflation risk that no corporate bond addresses.
If you’re willing to accept credit risk and thinner liquidity for higher income, corporate bonds earn a place. Investment-grade corporates offer a modest yield premium with historically negligible default rates. High-yield bonds pay substantially more, but the default and recovery numbers show losses are steep when defaults hit, and most investors are better served by a diversified fund than by picking individual junk issues.
Plenty of fixed-income portfolios hold both, using Treasuries as the stable foundation and layering corporate bonds on top for additional yield. The right mix depends on your tax situation, your time horizon, and how much price volatility you’re willing to accept from the part of your portfolio that’s supposed to be the calm anchor.