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How to Buy Treasury Bonds

There are three ways to buy Treasury bonds. Here's where, when, and how to get them.

So, you've considered the three main different types of securities offered by the U.S. Treasury - Treasury bonds, notes, and bills - and you've decided you want to invest in Treasury bonds because they carry the least risk of default or loss of any other investment, as they have a set interest rate and a face value paid at maturity. And because they're backed by "the full faith and credit" of the U.S. government.

Where to Buy Treasury Bonds

There are essentially three ways to go about buying Treasury bonds when they're issued, or T-Bonds, as they're called: directly from the U.S. Treasury, through a broker, or a bank.

Treasury bonds have a maturity of greater than 10 years - meaning you'll have to hold it for more than 10 years to receive its face value. Most Treasury bonds, which pay interest every six months, are issued in terms of 30 years. There are occasionally auctioned 10-year "zero-coupon" bonds, which mature in 10 years but pay no interest.

The price and yield of any particular Treasury bond are determined at auction. This means the price you pay may be greater than, less than or equal to the face value of the bond. The lowest face value on a bond is $1,000, and the lowest minimum bid accepted is $100, with $100 increments up to the face value. The maximum is $5 million.

So, you bid on a Treasury bond at a Treasury bond auction. Treasury bonds are auctioned monthly but originally issued for funding the U.S. government's spending needs in February, May, August and November. Bonds are also auctioned as re-openings in January, March, April, June, July, September, October and December. Re-Opened security has the same maturity date, coupon interest rate, and interest payment dates as the original, but has a different issue date and usually a different price.

At an auction, the Treasury accepts two types of bids: a noncompetitive bid, and a competitive bid.

  • A noncompetitive bid is a bid in which you agree to accept the interest rate determined at auction. This means you are guaranteed to receive the bond you want, in the full amount you want, for an interest rate set at the auction.
  • A competitive bid is one in which you specify the yield you're willing to accept. This means your bid could be accepted in the full amount you want if your bid is equal to or less than the yield determined at auction or is accepted in less than the full amount you want, if your bid is equal to the high yield, or can even be rejected if the yield you specify is higher than what's set at auction.

How to Buy Treasury Bonds

You can place a noncompetitive bid using the U.S. Treasury's portal, through a bank or a broker. To place a competitive bid, you have to use a bank or a broker, unless you have a TAAPS account. That's because a bank or broker is part of the TAAPS system: the Treasury Automated Auction Processing System.

TAAPS is, according to the Treasury, an application "for the exclusive use of institutions that provides direct access to U.S. Treasury auctions." The system electronically receives and processes tenders sent into U.S. Treasury auctions, and allows institutions to purchase marketable securities directly, reducing or eliminating intermediary costs and bringing direct bidding to their computers.

Who Can Buy Treasury Bonds?

Treasury bonds can be purchased by individuals, as well as entities like trusts, estates, corporations, and partnerships.

In any single auction, a non-competitive bidder can buy up to $5 million in bonds, or a competitive bidder can buy up to 35% of the initial offering.

What to Know Before Buying Treasury Bonds

The easiest way to buy a T-Bond is direct with a non-competitive bid. However, you could place a competitive bid through a bank or broker. To do that, you have to know something about the price you're willing to pay for the bond, and the bond's yield to maturity. And pay the broker or bank to place your bid.

The price of any fixed-rate security, like a T-Bond, depends on its relationship between its yield to maturity and interest rate. For instance, if the yield to maturity is greater than its interest rate, the price you pay will likely be less than its face, or "par," value. If the yield to maturity is the same as the interest rate, the price will be "equal to par," and if the yield to maturity is less than the interest rate, the price you pay will be greater than its face value.

When buying a T-Bond, any interest it accrued since its last interest payment is added to the purchase price of the bond. At the next interest payment date, the investor receives the full interest payment.

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As of February, the average yield on a 30-year Treasury bond remains about 3%.

  • T-Bonds are long-term investments. You cannot purchase one directly from the Treasury for less than $100, and T-Bonds usually are purchased in increments of $100, with face values of $1,000.
  • The minimum maturity of a $1,000 T-Bond is 10 years. Meaning, while you'll be paid interest every six months on your $1,000 loan to the government, you won't be paid back to your principal for a minimum of 10 years.
  • You could sell your T-Bond after purchase on the secondary market, but rates and prices fluctuate considerably there because the debt is virtually guaranteed to be paid.

How Much Money Can You Make From Treasury Bonds?

You can make money holding your bond to maturity, and reinvesting the interest payments in other bonds. But you don't have to hold a bond for 30 years - you can sell it on the secondary market after the first 45 days of holding it.

The risk in a Treasury bond is that interest rates will rise beyond what you're getting in the 30 years, reducing the value of holding your bond. Because of that, while it is a relatively low interest, 30-year bonds often pay a higher rate than shorter-maturity securities to compensate a buyer for that risk.

For instance, the average current yield on a Treasury bond is 3%. But core inflation - the rate at which prices rise - remained below 2% for 2018. So, if the average core annual inflation rate remains below 3% in the U.S., you'll make money without having to do anything but collect your interest. And also, there's no risk of losing your principal, as there is with other investments, as you're guaranteed by the U.S. government to be paid the face value of the bond when it matures.

Similarly, if the federal funds target rate - the rate of interest charged by the U.S. government for banks to borrow money from the "lender of last resort" - remains below 3%, you're still likely to be paid a higher yield to maturity than if your money was sitting in a bank that would pay you less because it pays less to borrow money from the federal government.

That's why competitive bidding also exists, so buyers can obtain a specified interest rate, rather than accepting whatever interest rate is set at auction.

It's also why another type of Treasury security is available to investors:

Treasury Inflation-Protected Securities

Treasury Inflation-Protected Securities, called TIPS, is another type of debt instrument offered by auction by the U.S. Treasury. TIPS, also issued in electronic form, is sold in increments of $100, and the minimum purchase price is $100, with 5, 10 and 30-year maturities. Like other such debt, the interest rate is determined at auction.

With TIPS, the principal is adjusted by changes in the Consumer Price Index (CPI), which is a measure of inflation. With a rise in the prices paid for certain goods by consumers - indicated by a rise in the index - the principal of TIPS increases. With a drop in the index - disinflation, or, in the event of a drop below zero, deflation - the principal of TIPS decreases.

Because TIPS are tied to the CPI, the sum you're paid when TIPS mature and the amount of interest you're paid on your TIPS every six months varies. TIPS pay interest at a fixed rate. But because the rate is applied to an adjusted, or variable, principal, the number of interest payments can vary from one period to the next. If inflation occurs, as indicated by a rise in the CPI, the interest payment increases. If instead deflation occurs, the interest payment decreases.

However, at the maturity of a TIPS, you'll receive either the original principal or the adjusted principal, whichever is greater. This is why TIPS are considered also protection against deflation. And the U.S. Treasury provides TIPS Inflation Index Ratios so investors can easily calculate the change to their principal resulting from CPI changes.

As with the others, a noncompetitive bid can be placed directly with the U.S. Treasury, or through a bank or broker, while a competitive bid requires the use of a bank or broker. TIPS, also like the other instruments, can be held until maturity, or sold in the secondary market before maturity.

A bidder can buy up to $5 million in TIPS by non-competitive bidding in a single auction, or up to 35% of the initial offering by competitive bidding.