TreasuryDirect is My Favorite Way to Buy Bonds

I love TreasuryDirect! It’s a free site run by the US Government to allow all citizens to buy US Government debt securities. You can buy several types of savings bonds, and more importantly, you can directly participate in treasury bill, note, and bond auctions. This means that individual investors with as little as $100 can invest on perfectly equal footing with huge institutional investors. They all get exactly the same pricing. It’s amazing! I don’t think there’s any other situation in which an individual can buy a security for such a small amount and get exactly the same terms as CALPERS buying hundreds of millions of securities at the same time. It’s a true egalitarian marvel.

It’s actually slightly dumb for me to even write this article because the service is directly competitive with my core service offering as a fee based financial adviser. The more that my clients or potential clients invest with TreasuryDirect, the less they invest with me, and the less money I make. But I don’t care, it’s such a cool system that I want lots of people to know about it anyway. But before we dive into TreasuryDirect, let’s take a look at how US Treasury auctions work…

How Treasury Auctions Work

US Treasury auctions are the primary mechanism through which the United States government raises funds to finance its budget deficit and refinance maturing debt. They are the heartbeat of the global debt market, influencing borrowing costs worldwide and serving as a critical risk benchmark. The US Department of the Treasury conducts these auctions regularly, offering various types of securities to investors. These auctions serve several crucial purposes:

• Funding government operations and projects
• Managing the national debt
• Providing benchmark interest rates for the broader financial market
• Offering safe-haven investments for domestic and international investors

Treasury Securities and Their Types:

The US Treasury issues several types of debt instruments, each with its unique risk and return profile. These include Treasury bills (T-bills), notes, bonds, Inflation-Protected Securities (TIPS), and floating rate notes (FRNs).

• Treasury Bills (T-Bills): Short-term securities with maturities ranging from a few days to 52 weeks. T-Bills are sold at a discount and do not pay periodic interest.
• Treasury Notes (T-Notes): Medium-term securities with maturities from 2 to 10 years. They pay interest semi-annually.
• Treasury Bonds (T-Bonds): Long-term securities with 20 or 30-year maturities. Like T-Notes, they pay interest semi-annually.
• Treasury Inflation-Protected Securities (TIPS): Securities whose principal is adjusted based on changes in the Consumer Price Index, offering protection against inflation.
• Floating Rate Notes (FRNs): Relatively new securities with interest payments that vary based on changes in short-term interest rates.

The Auction Process

Every week, the Treasury Department holds auctions for its securities. The process begins with an announcement specifying the amount to be auctioned, the issue date, and the maturity date. On the auction date, bidders submit their bids electronically through the Treasury Automated Auction Processing System (TAAPS). There are two types of bids:

• Noncompetitive bids: Specify only the quantity, accepting whatever yield is determined by the auction.
• Competitive bids: Specify both the quantity desired and the yield the bidder is willing to accept.

The Treasury uses a single-price auction format. It arranges competitive bids in ascending order of yield and accepts bids starting from the lowest yield until the entire offering amount is covered. The highest accepted yield becomes the “stop-out” yield.

All noncompetitive bidders receive the full amount of their bids at the stop-out yield. Competitive bidders who bid at or below the stop-out yield receive securities at that yield. If the auction is oversubscribed at the stop-out yield, those bidders are awarded securities on a pro-rata basis.

After the Auction

Following the auction, the Treasury Department announces the results, including the total amount of bids, the amount of securities sold, and the range, median, and average yields. Those who bid successfully receive their securities on the issue date and start earning interest.

Key Participants

Understanding the major players in Treasury auctions is crucial:

• Primary Dealers: A group of banks and broker-dealers authorized to trade directly with the Federal Reserve. They are required to participate in Treasury auctions and often act as market makers in the secondary market.
• Investment Funds: Mutual funds, pension funds, and other institutional investors frequently participate in auctions to manage their portfolios.
• Foreign Central Banks and Governments: Major holders of US Treasuries, often participating to manage their foreign exchange reserves.
• Individual Investors: Can participate through TreasuryDirect or via a broker.
• The Federal Reserve: While not directly participating in auctions, the Fed’s monetary policy decisions and its own Treasury holdings significantly influence auction outcomes.

The Secondary Market

While auctions are the primary way to purchase Treasury securities, there is also an active secondary market where investors buy and sell these securities. The prices in this market fluctuate based on various factors, including changes in interest rates, economic data, and geopolitical events.

Economic Impact of Treasury Auctions

Treasury auctions have far-reaching implications for the economy:

• Interest Rates: The yields established in these auctions serve as benchmarks for many other interest rates in the economy, influencing everything from mortgage rates to corporate bond yields.
• Monetary Policy: The Federal Reserve closely watches Treasury yields as it formulates and implements monetary policy.
• Fiscal Policy: The government’s ability to borrow at certain rates influences fiscal policy decisions.
• Market Sentiment: Auction results can provide insights into market perceptions of economic conditions and government creditworthiness.
• International Capital Flows: As a significant portion of US debt is held internationally, these auctions can influence global capital flows and exchange rates.

What is TreasuryDirect?

TreasuryDirect is an online platform operated by the U.S. Department of the Treasury. It allows individual investors to purchase various types of government securities directly from the U.S. Treasury, bypassing brokers and banks. This direct access can potentially save investors money on fees and commissions.

Types of Securities Available

Through TreasuryDirect, investors can purchase several types of securities, including all types available at public treasury auctions. In addition, there are several securities that are only available to individual investors.

1. Treasury Bills (T-Bills): Short-term securities that mature in one year or less.
2. Treasury Notes (T-Notes): Medium-term securities that mature in 2, 3, 5, or 10 years.
3. Treasury Bonds (T-Bonds): Long-term securities that mature in 30 years.
4. Treasury Inflation-Protected Securities (TIPS): Securities that protect against inflation by adjusting the principal based on changes in the Consumer Price Index.
5. Series EE Savings Bonds: Bonds that earn a fixed rate of interest for up to 30 years.
6. Series I Savings Bonds: Bonds that earn a combination of a fixed rate and an inflation rate.

Key Benefits of TreasuryDirect

1. Safety: U.S. government securities are considered among the safest investments available, backed by the full faith and credit of the U.S. government.
2. Low Minimum Investment: You can start investing with as little as $25 for savings bonds or $100 for Treasury securities.
3. No Fees: There are no fees to open or maintain a TreasuryDirect account or to purchase securities.
4. Competitive Rates: Treasury securities often offer competitive rates compared to other low-risk investments like CDs or money market accounts.
5. Tax Advantages: Interest earned on Treasury securities is exempt from state and local taxes.
6. Automatic Reinvestment: You can set up automatic reinvestment of your maturing securities.
7. Direct Ownership: You own the securities directly, rather than through a third party.

How to Use TreasuryDirect

To start using TreasuryDirect, you’ll need to open an account on their website. The process is straightforward but does require some personal information, including your Social Security number and a U.S. address.

Once your account is set up, you can purchase securities through scheduled auctions or, in the case of savings bonds, at any time. You can manage your portfolio online, viewing your holdings and transaction history.

Considerations and Potential Drawbacks

While TreasuryDirect offers many benefits, there are some factors to consider:

1. Liquidity: Treasury securities are less liquid than stocks or mutual funds. While you can sell them before maturity, you’ll need to transfer them to a bank, broker, or dealer to do so.
2. Limited Investment Options: TreasuryDirect only offers U.S. government securities. For a diversified portfolio, you’ll need to invest through other platforms as well.
3. No Professional Management: Unlike mutual funds, there’s no professional management of your investments.
4. Technology Limitations: The TreasuryDirect website can be somewhat outdated and may not offer the same user experience as modern brokerage platforms.
5. No IRA Options: You can’t open an IRA through TreasuryDirect.

I Love Treasury Direct

TreasuryDirect is a great site. You should visit it, and consider using it as part of your debt investment portfolio. And you should talk to me about the rest of your investments. Send me an email or book some time on my Calendly today!