Investing in government bonds is a great way to diversify your investment portfolio. This is because your money is backed by the full faith of the U.S. government, so there’s virtually no risk of default. This stability is what makes U.S. Treasury securities attractive to both risk-averse investors and those looking to hedge against riskier investments. A simple and popular way to purchase Treasury securities is through Treasury Direct, an online platform that the Treasury Department sponsors.
With Treasury Direct, you can buy government bonds free of commissions or other fees. We’ll break down what Treasury Direct is, how to set up an account and how to go about buying securities with it.What is Treasury Direct?
Treasury Direct is an online, government-sponsored platform where you can buy federal government securities directly from the U.S. Treasury. You can buy Treasury bills, bonds, notes, savings bonds, floating rate notes (FRNs) and Treasury inflation-protected securities (TIPS) on the platform.
The idea behind Treasury Direct is to provide a place for individuals and institutional investors to purchase Treasury securities directly from the government without having to go through a broker or another middleman. You can link your Treasury Direct account to any personal bank account, making for a very streamlined purchasing process.
You can set up an account with Treasury Direct online in just 10 minutes. All you’ll need is your email address, Social Security Number (SSN) or Employee Identification Number (EIN), your bank account number and your routing number. Just head to the Treasury Direct website and follow the instructions, and you’ll be ready to start purchasing bonds.Treasury Direct Auctions
On Treasury Direct, securities are issued through auctions. Auctions happen regularly, and the Treasury Department will typically give several days notice so that anyone who wants to bid has a chance (more on bidding below). Once it announces an auction, you’ll have until the day of the auction to make your bid. Some securities follow a regular auction schedule. For instance, the 52-week Treasury bill auctions every four weeks, typically on a Thursday. Four-week, eight-week, 13-week and 26-week bills auction on a weekly basis.
A security’s auction will establish its rate (in the case of Treasury bills), yield (in the case of notes, bonds and TIPS) or discount margin (in the case of FRNs). Once it concludes, successful bidders will receive a paperless, electronic security in their Treasury Direct account.
Treasury Direct only auctions new securities. If you’re looking to purchase on the secondary market, you’ll need to do so from a commercial bank, investment company, brokerage firm or other financial institution.Competitive vs. Noncompetitive Bidding
When you bid on Treasury securities, you have the option of submitting a noncompetitive bid or a competitive bid. Most individual investors opt for noncompetitive bidding. With a noncompetitive bid, you are essentially saying you will accept the rate/yield/discount margin at the conclusion of the auction. You are able to spend up to $5 million on a noncompetitive bid.
With a competitive bid, you specify a rate/yield/discount margin that you will accept. Once the auction is over, you’ll receive some, all or none of your bid depending on the rate/yield/discount margin that the Treasury ends up issuing. With a competitive bid, you’re able to bid on a maximum of 35% of the securities being issued.
Once the deadline to submit bids has passed, the Treasury will issue securities to all noncompetitive bidders. Then, it will issue to the competitive bidder with the lowest rate/yield/discount margin and continue up until it runs out of securities. The rate/yield/discount margin at which it stops will be what all successful bidders receive.Bottom Line
When it comes to investing, it’s crucial to diversify your portfolio. You don’t want to put all your assets in one stock or fund. And even a stock-heavy portfolio that’s mostly in index funds can see a big loss when the market declines. That’s why government bonds can be so attractive. If you’re looking to buy T-bills or other government securities, using Treasury Direct is the best way to do it. You can easily connect it to your personal bank account. Plus, you won’t have to worry about the extra fees and commissions that come with using a broker.Tips for Smart Investing
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The post How to Use Treasury Direct to Buy Government Bonds appeared first on SmartAsset Blog.
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