How To Buy Treasury Bonds

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In uncertain economic times with a possible recession looming, investors often look for low-risk strategies for earning a return. As treasury bonds are one of the options that fit these characteristics, many are left wondering how to buy treasury bonds and bills. Here’s the full breakdown.

Quick Take

Treasury bonds are government-backed investment vehicles that provide investors and consumers with a return with very little risk. They are an ideal choice for risk-averse individuals but may fall short for those chasing greater returns.

What Are Treasury Bonds?

Treasury bonds are a debt security issued by the U.S. government. They provide a safe way to earn interest on capital invested at very low risk. Treasury bonds are particular securities offered in terms of either 20 or 30 years and they are auctioned monthly. Interest on treasury bonds is payable every 6 months. 

Although they are offered in 20-year or 30-year terms, treasury bonds can be sold for an early payout before maturity. Treasury bonds are now only issued electronically. There are no longer any paper-issued treasury bonds — this ceased in 2016.

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How Do Treasury Bonds Work?

Treasury bonds, in essence, are a loan to the U.S. government. In return for the invested capital, those that buy treasury bonds will earn interest. The interest and an increase in the principal amount invested will be liable for federal income tax but local state taxes won’t apply.

What Are the Benefits of Treasury Bonds?

The benefit of treasury bonds is that there’s almost no possibility of losing the initial investment amount. Bond prices will move based on the rate of inflation, deflation and interest rates, but investors will always be paid back at least the principal amount.

Additionally, investors have the potential to earn a percentage yield on the amount invested, and the bond price may increase, too. That being said, this gain is taxable at the federal income tax rate.

How Do Treasury Bond Rates Work?

Both the price and rate of interest payable on treasury bonds are decided at auction. This format means that treasury bonds can be bought at a discount, at a premium or on par with the interest rate. If the yield is higher than the coupon interest rate, the treasury bond is being purchased at a discount whereas if the yield is lower, it is being bought at a premium.

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Where Can I Buy Treasury Bonds?

Treasury bonds can be bought from TreasuryDirect, either with a bank or a broker. Purchases are completed through auction, and there are two ways to buy these bonds:

  • Non-competitive bids
  • Competitive bids

Non-competitive bids — which accept the interest rate decided at auction — can be completed using TreasuryDirect, a bank or a broker. For competitive bids, which are pre-determined interest rates that a buyer is willing to accept, a bank or broker must be used.

How To Buy Treasury Bonds With TreasuryDirect

First, an account must be opened. A U.S. address and tax identification number will be required. Once that’s done, there are a few simple steps:

  • Log into the TreasuryDirect account online.
  • Select the “BuyDirect” tab.
  • Choose “Treasury Bonds” and input the amount being bought.

From there, people can set up recurring purchases as well as choose to invest interest accrued in other Treasury securities.

How To Buy Treasury Bonds With a Bank or Broker

For competitive purchases, consumers need to use a bank or broker. There may be a slightly different process for each. However, the main criteria will involve selecting the acceptable yield and how much to buy at auction. The request will then be processed. 

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In certain cases, a portion of the amount submitted will be purchased but the full amount may not always be granted. It’s also important to note some institutions will charge a fee for placing treasury bond bids.

Can a Tax Refund Be Used To Buy Treasury Bonds?

Yes, a tax refund can be used to purchase treasury bonds. If consumers wish to, they can also deposit any tax refunds directly into their TreasuryDirect account to purchase securities. The process is as follows:

  • Enter the TreasuryDirect routing number — 051736158 — on the tax return where required.
  • Input the account number it’s being sent to in the field required.
  • Put “Savings” as the account type.

Can You Lose Money on Treasury Bonds?

Treasury bonds are among the highest quality bonds. They are backed by the U.S. government, which gives them credibility as the federal government has never defaulted on its debt. As such, treasury bonds are regarded as an extremely safe investment to earn a small portion of extra income. Buyers of treasury bonds will always receive at least the principal back and, usually, a small return on top.

Final Take

Treasury bonds are a good addition to a diversified portfolio of investments, and they are an excellent form of value protection when economies fall on hard times. Still, while effective for managing risk, buyers may want to also include assets that have the potential to offer greater returns to optimize financial well-being over the long term.

Information is accurate as of July 28, 2022.

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About the Author

David is a qualified financial advisor in the Republic of Ireland. He has a bachelor's degree in business and entrepreneurship, as well as over five years of investing experience.
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