Why can't the US Treasury Borrow directly from the Fed?

The US Treasury does not borrow. The Treasury is not a government bank like the Federal Reserve.

Typically, the Federal Reserve lends to member banks for very short periods of time (days or sometimes months) where as US Treasury Bonds are debt securities that last for over 10 years. That difference in the length of time is the biggest difference in the rates.

Pretty much. But it is deliberate - a way to keep the banks somewhat profitable without getting Congress involved.

http://en.wikipedia.org/wiki/Federal_Reserve_Syste...

You read about a few big banks making big profits, but it is also the case that there have been many bank bankruptcies this year.

http://www.bankruptcy-statistics.com/

More generally, the Fed controls how much it lends to banks - banks can't always borrow as much as they would like.

http://en.wikipedia.org/wiki/Discount_window

As for why the Treasury puts out bonds rather than just creating money, that too is deliberate. It has to do with such factors as "crowding out" and control of the money supply.

http://en.wikipedia.org/wiki/Crowding_out_(economi...

Modern monetary theory says that there is no real reason to do this,

http://en.wikipedia.org/wiki/Chartalism

though, of course, not every economist subscribes to modern monetary theory and most politicians don't.

If the Treasury is going to borrow money at all, it has to do it at prevailing rates - the interest rates that the financial markets are willing to lend at. But the Treasury doesn't have to borrow money at all; it chooses to.)

As for the difference in interest rates. The Fed lends money for very short periods (typically overnight). The Treasury borrows money for longer periods (from one month to 30 years). The longer the period, the higher the interest rates:

http://www.ustreas.gov/offices/domestic-finance/de...

So it is no surprise that the overnight rate is much lower than the rate for 30 year notes.

The primary function of banks is to convert short-term money (such as checking accounts and overnight loans from the Fed) into long term money (such as long term loans to homeowners for mortgages, as well as the U.S. Treasury, etc.).

http://en.wikipedia.org/wiki/Diamond-Dybvig_model

That is what they are getting paid for.