How to Buy Treasury Bonds

Buying a bond is one way to invest by lending your money at interest to a corporation, municipality or the U.S. federal government in the case of U.S. Treasury bonds. Learning how to buy Treasury bonds is integral to creating a great investing strategy. Read on to learn the ins and outs of becoming a bondholder.

Key Takeaways:

• Decide how you want to purchase the bond. You can do this through the U.S. Treasury, through a bank, or through a broker.
• You will place a competitive or non-competitive bid on the bond.
• After your bid is accepted, you will get confirmation of your purchase of the bond.
• Hold the bond and await the maturity date.

What is a Treasury Bond?

Treasury bonds, like all Treasury securities, have the backing of the full faith and credit of the U.S. government. Much like other bonds, such as municipal bonds or corporate bonds, Treasury bonds have a fixed interest rate and a face value. As a debt security, you’re technically buying into the government’s projects and receiving a return once those projects should be complete.

This payment is also known as a nominal, par or principal value amount, and it gets paid in full to the holder once the bond reaches its maturity date. The bond issuer lets you know what the bond price and rate are, and you can buy in at a range of issue prices.

Treasury, or T-bonds, as they are commonly called, are one of the best ways to invest for the long term. They mature between 10 and 30 years. This means that you wait 10 years from the bond’s issuance to receive the full face value of the bond.

You can also sell your bond in the secondary market before maturity if you’ve held the bond for 45 days after the initial offering.

Since T-bonds are essentially loans to the U.S. government, they also involve interest payments. A coupon payment for a bond consists of the annual payment of interest that a bondholder gets from the day the bond is issued until it matures. In the bond market, these payments help investors guarantee future income on government bonds. Remember, however, that not all coupon rates will generate massive payments.

One of the most popular Treasury bonds is called the long bond. It has a maturity of 30 years and pays interest on the principal amount every 6 months.

The Treasury also issues 10-year zero-coupon bonds or Treasury Inflation-Protection Securities (TIPS) that are sold at a deep discount and pay no interest. The principal is paid in full once the 10-year life of the bond has concluded.

How to Buy Treasury Bonds

In the following sections, Benzinga delves into the step-by-step process of purchasing Treasury bonds, guiding you through each stage with ease and confidence.

Pick Where You’ll Purchase the Bonds

You have your choice of buying Treasury bonds directly from the U.S. Treasury, through a bank or a broker. You must also decide whether you want to make a noncompetitive or competitive bid.
The former lets you buy directly from the Treasury and the latter requires you to use a broker or bank.
Keep in mind that Treasury bonds are sold in lots of $1,000. To begin investing or trading in bonds, you should have at least $1,000 or more in a bank or TreasuryDirect account. Some bonds are sold at a price discount, such as zero-coupon bonds, so the minimum amount accepted for a bid in a TreasuryDirect account is $100 for this type of Treasury security.

Place a Bid

Once you’ve opened your account with TreasuryDirect or have arranged to purchase bonds through your broker or bank, you’ve arrived at the bidding stage. This is where you place a bid on a particular bond to be auctioned by the Treasury.
The steps differ somewhat depending on whether you’re buying directly from the Treasury or from a broker or bank.
The main difference between them is the paying of a commission or a fee to the broker or bank. Since you probably don’t represent a large financial institution, your bid for Treasury bonds will most likely be a non-competitive tender.

Getting Confirmation

The last step consists of getting a report from your broker or bank or a confirmation of your purchase from TreasuryDirect. If you have submitted a noncompetitive bid, you should receive a confirmation with the yield from the auction from TreasuryDirect after the conclusion of the auction. The bank will confirm your transaction after it has received its portion of the auction and according to its own guidelines if you purchased your bonds through a bank.

If you purchased your bonds through a broker, you’d receive your confirmation on the broker’s internet trading platform or on the telephone from your broker’s representative.

Best Online Brokers

When you’re ready to start your bond investing journey, look out for the best online broker to help build your portfolio. Look into the debt instruments that work best for you and use a broker that helps you invest in a manner that makes sense.

Where to Buy Treasury Bonds

Here are various methods for purchasing Treasury bonds.

Buying T-Bonds Directly From the U.S. Treasury

You must first have an account open at TreasuryDirect to buy T-bonds directly from the U.S. Treasury. Opening a TreasuryDirect account involves submitting all of your pertinent personal information, including your bank account and bank routing numbers.

After you’ve opened your TreasuryDirect account, you’ll have access to TreasuryDirect’s online platform that allows you to see the Treasury offerings and enter your bids. All TreasuryDirect transactions take place online, including the bidding process.

Treasury auctions are done through a Dutch auction, which means that bids for the offering begin at high prices and are reduced until a price is arrived at where the entire auction can be sold.

Dutch auctions are also common in the stock initial public offering (IPO) market, where the initial market price for a new security is determined.

Buying T-Bonds Through a Bank

To purchase Treasury bonds through a bank, you must first have the appropriate type of account at that bank. You then make arrangements with the bank to place a bid on a particular T-bond you’re interested in buying.

Banks accept competitive and noncompetitive bids, so you’ll have to specify to your bank what bid you wish to place or whether you want to place a noncompetitive bid. You will also need to state the type of account you want to make the purchases in.

Keep in mind that by placing a competitive bid through a bank or a broker, you run the risk of not receiving any portion of the auction if your bid does not match or improve on the prevailing market bid price.

Even if your bid price was accepted, you may only receive a portion of the bonds you allotted funds for purchasing, depending on the bonds’ availability and the number of bonds from the auction available to your bank.

Even if your bid price was accepted, you may only receive a portion of the bonds you allotted funds for purchasing, depending on the bonds’ availability and the number of bonds from the auction available to your bank.  

Buying T-Bonds Through a Broker

You must have an account open with a broker that is part of the Treasury Automated Auction Processing System (TAAPS) in order to buy T-bonds.

This exclusive system provides direct access to U.S. Treasury auctions and allows financial institutions to buy the Treasury’s marketable securities directly, eliminating or reducing costs and giving brokers and banks direct bidding capability.

You can specify the number of bonds you wish to purchase at your price and bid for up to 35% of the total auction amount. Noncompetitive bids mean you are limited to a total of $5 million in bonds and must accept the yield arrived at during the auction.

Buying T-Bonds Through a Broker

You must have an account open with a broker that is part of the Treasury Automated Auction Processing System (TAAPS) to buy T-bonds.

This exclusive system provides direct access to U.S. Treasury auctions and allows financial institutions to buy the Treasury’s marketable securities directly, eliminating or reducing costs and giving brokers and banks direct bidding capability.

You can specify the number of bonds you wish to purchase at your price and bid for up to 35% of the total auction amount. Noncompetitive bids mean you are limited to a total of $5 million in bonds and must accept the yield arrived at during the auction.

Bidding

Bidding via Treasury Direct

First, log in to your account and click the BuyDirect tab to buy T-bonds through TreasuryDirect. Then, follow the prompts to select the specific bond you plan to purchase. After you select the security, enter the purchase amount and other requested information.

TreasuryDirect allows you to set up reinvestments into securities of the same type and term, such as using the proceeds from a 30-year bond at maturity to buy another 30-year bond. The price paid on the bond includes either a premium or a discount and accrued interest, depending on the issue.

Submitting a bid to TreasuryDirect means you agree to accept whatever yield is determined at auction and are guaranteed to receive the bond you want in the amount you specify. This type of purchase is made through what is called noncompetitive bidding.

TreasuryDirect allows you to withdraw the funds from the bank account you specified. After the bond matures, TreasuryDirect deposits the principal payments back to your chosen bank account.

Bidding via a Bank or Broker

Once you have opened the appropriate account at a bank or have secured the necessary permissions from your online broker, they will accept your bid. This is done either through a representative of the bank or through an online trading platform of your broker.

Many online brokers do not charge a fee for bond transactions, though you can phone in your order and speak with an account executive. Just expect to be charged a fee for personal assistance.

When bidding through a broker, you can choose a noncompetitive bid or a competitive bid. If you submit a noncompetitive bid, then you agree to accept the yield determined at auction and you receive the bond of your choice in the amount of your bid.

If you choose to place a competitive bid, then you must specify the yield you want to receive and the number of bonds you’re bidding on. Keep in mind that the yield moves in the opposite direction to the price of the security.

If the yield declines, then the price of the bond increases, and vice versa.

Note that the Treasury caps the number of bonds a single purchaser can buy of any given T-bond auction at 35% of the total auction amount.

Treasury Notes vs. Treasury Bonds vs. Treasury Bills

Let's break down the key differences between these types of bonds to help you make the best investment decision for your financial future.

Treasury Notes

• Treasury notes are debt securities issued by the U.S. Department of the Treasury with a maturity period between one to ten years.
• They pay interest semi-annually, and the interest rate is fixed at the time of issuance.
• These notes are typically bought and sold in the secondary market, allowing investors to trade them before maturity.
• They are considered to have moderate risk compared to other Treasury securities.
• Treasury notes are commonly used by investors seeking a balance between risk and return, as they offer higher yields than Treasury bills but lower yields than Treasury bonds.

Treasury Bonds

• Treasury bonds are long-term debt securities issued by the U.S. Department of the Treasury with a maturity period of more than ten years.
• They pay interest semi-annually, and the interest rate is fixed at the time of issuance.
• Like Treasury notes, Treasury bonds can be bought and sold in the secondary market before maturity.
• They are considered to have a higher risk compared to Treasury notes and bills due to their longer maturity period.
• Treasury bonds are often used by investors who are willing to hold their investments for an extended period and are looking for a steady income stream.

Treasury Bills

• Treasury bills, also known as T-bills, are short-term debt securities issued by the U.S. Department of the Treasury with a maturity period of one year or less.
• Unlike Treasury notes and bonds, Treasury bills do not pay interest semi-annually. Instead, they are issued at a discount to their face value and redeemed at full face value upon maturity.
• Treasury bills are typically sold at auctions, and the difference between the discounted price and face value represents the investor's return.
• They are considered to have the lowest risk among Treasury securities due to their short-term nature and backing by the U.S. government.
• Treasury bills are often used by investors seeking a safe and liquid investment option, as they are highly marketable and can serve as a cash equivalent.

Treasure Bonds vs. Savings Bonds

Treasury bonds and savings bonds are both investment options offered by the government, but they have some key differences. Treasury bonds are long-term investments with a maturity period of 10 to 30 years. They offer a fixed interest rate and are considered safer investments compared to savings bonds. Treasury bonds are typically bought by institutional investors and individuals looking for a long-term investment with a guaranteed return.

On the other hand, savings bonds are more accessible to individual investors and have shorter maturity periods, ranging from 1 to 30 years. They offer a variable interest rate that is adjusted every six months based on market conditions. Savings bonds are often seen as a safe and low-risk investment option, suitable for those looking to save money over a shorter period of time. Overall, the choice between treasury bonds and savings bonds depends on an individual's investment goals, risk tolerance, and time horizon.

Are Treasury Bonds for You?

Investing in the future is a cornerstone of sound personal money management to provide long-term financial security for you and your family. Treasury bonds are often used for that purpose.

Since the risk of default on government bonds is extremely low, the flow of interest payments to bondholders is a popular reason for investing in these fixed-income securities.

Nevertheless, as an inflation hedge, the yield on 30-year Treasury bonds often barely offsets the inflation risk in the economy. Also, if inflation increases, the Federal Reserve typically raises its benchmark interest rates. This, in turn, causes the current value of T-bonds to decrease, despite the fact that they will still pay the full face amount out at maturity.

While your cash flow from interest payments may just barely hedge inflation levels, you might still benefit from the safety of keeping your money in a long-term U.S. government security that is still widely considered a risk-free investment.

Just starting your investing journey and want to buy bonds? Take a look at Benzinga's top online brokers for beginners, how to buy municipal bonds and the best bond funds.

Frequently Asked Questions