How to buy Treasury bonds (2024)

Key points

• U.S. Treasury bonds are an excellent source of low-risk interest income for investors.
• Investors can hold Treasury bonds to maturity to collect interest or attempt to trade them to profit off of fluctuations in the bond market.
• Investors can buy Treasury bonds directly from the U.S. government or on the secondary market via a brokerage account.

U.S. Treasury bonds, known as T-bonds, are one of the most popular ways for investors to generate low-risk income. Because they are backed by the U.S. government, their regular interest payments are as close to a guarantee as you can find in the market today.

Treasury bonds can be a great addition to your investment holdings. But it’s important to understand how they work before you invest.

Understanding Treasury bond terms

Treasury bonds are essentially loans investors make to the U.S. government. The government then makes interest payments on those loans at regular intervals until the bond matures, at which point the principal investment, or par value, is returned to the buyer. The yield on Treasury bonds is typically relatively low compared to other types of bonds, such as corporate bonds or municipal bonds. The low yield is a reflection of the U.S. government’s extremely low default risk.

Treasury bonds are the longest-term U.S. Treasury securities and have maturities of 20 or 30 years. Treasury bonds pay a fixed interest rate to owners every six months and are considered fixed-income investments.

There are several other popular types of Treasury securities:

• Treasury notes, or T-notes, are like Treasury bonds but with maturities of two, three, five, seven or 10 years.

• Treasury bills are structured identically to T-bonds and T-notes but have even shorter maturities of four to 52 weeks.

• Treasury inflation-protected securities, or TIPS, are a type of Treasury bond sold in increments of five, 10 or 30 years. The principal adjusts with U.S. inflation or deflation.

• Floating-rate notes, or FRNs, are a type of bond that matures in two years, pays interest on a quarterly basis and has a floating interest rate that changes based on the highest accepted discount rate of the most recent 13-week Treasury bills.

Treasury bonds are also similar to U.S. savings bonds. Both T-bonds and U.S. savings bonds are issued by the U.S. Department of the Treasury. While Treasury bonds can be bought or sold on secondary markets, savings bonds can be cashed only through the U.S. Treasury. Savings bonds can be purchased for as little as $25, whereas T-bonds have a $100 minimum purchase.

If you cash a savings bond within five years of purchasing it, you lose the last three months of interest payments. Investors must hold a T-bond for at least 45 days before they can sell it on secondary markets.

When should you buy Treasury bonds?

Treasury bond buyers can buy T-bonds and hold them to maturity or sell them before they mature and attempt to profit off fluctuations in the bond market. Bond prices and interest rates are inversely correlated, so the best time for investors to buy T-bonds is usually when interest rates are peaking.

However, Scott Stanley, certified financial planner and founder of Pharos Wealth Management, says potential T-bond buyers should consider other factors as well. For example, investors who plan to hold their T-bonds to maturity should watch the Treasury yield curve, which compares the yields of longer-term T-bonds to shorter-term T-notes and T-bills.

“Wait for the T-bond rates to be greater than the T-note and T-bill rates,” Stanley says.

Thanks to soaring inflation, Treasury yields hit their highest level in more than a decade in 2022. However, inflation has finally started trending downward again, and the bond market is now pricing in a nearly 90% chance the Federal Reserve will pause interest rate hikes by June, according to CME Group. Investors are anticipating the Fed will pivot to interest rate cuts in the second half of the year.

Nirav Desai, managing principal at Qubera Wealth Management, says an unexpected bounce in interest rates could be bad news for bondholders.

“Unless you hold your Treasurys to maturity, you might have to sell at a loss,” Desai says. “One way to avoid this is to hold short-term Treasurys.”

Desai says he prefers holding 90-day Treasury bills to maturity, a strategy that currently pays a 4.85% yield for a three-month commitment.

Fortunately for investors, David Nicholas, portfolio manager at XFUNDS and CEO of Nicholas Wealth Management, says the current environment may be an excellent time to invest in T-bonds.

“At this moment, we have both slowing economic growth and declining inflation expectations. This is the magic formula for bonds to do very well,” Nicholas says.

How and where to buy Treasury bonds

There are several options for investors who want to purchase Treasury bonds. To buy T-bonds directly from the government, investors must participate in an electronic auction. The Treasury posts a calendar of upcoming auctions on its website.

To participate in an auction, an investor can set up an account with TreasuryDirect and select the BuyDirect tab to choose a bond and an amount to purchase. Once the information is complete, you can place a bid to buy a T-bond. Alternatively, investors can set up an account with a bank or a brokerage that has access to the Treasury Automated Auction Processing System, known as TAAPS.

Bids are either noncompetitive or competitive:

• Noncompetitive: An investor agrees to accept the rate, yield or discount margin determined during the auction. If you’re using your TreasuryDirect account, your bid will be noncompetitive.

• Competitive: An investor specifies a rate, yield or discount margin they deem acceptable. Competitive bidding must be done through a bank, broker or dealer.

All Treasury marketable securities have a minimum bid of $100. Investors can bid in increments of $100 all the way up to a maximum of $10 million for noncompetitive bids and 35% of the offering amount for competitive bids.

In addition to buying Treasury bonds directly, investors can buy them on the secondary market via their brokerage account. Fees on T-bond purchases vary from broker to broker, but buying bonds in a brokerage account gives investors access to the highly liquid secondary Treasurys market. The secondary market makes it quick and easy to sell your bonds at a later date. Investors who buy T-bonds via a brokerage can also do so in an individual retirement account, or IRA, or another tax-advantaged retirement account.

Finally, investors who want to take a more diversified approach to investing in Treasurys can buy a Treasury exchange-traded fund, or ETF, or a Treasury money market mutual fund. For example, the Vanguard Treasury Money Market Fund (VUSXX) invests a minimum of 80% of its fund in Treasury bills and repurchase agreements fully collateralized by U.S. Treasury securities. The popular iShares 20+ Year Treasury Bond ETF (TLT) focuses specifically on Treasury bonds and has more than $34 billion in assets under management.

How to sell Treasury bonds

All sales of Treasury marketable securities must happen through a bank, broker or dealer. To sell any security in TreasuryDirect, an investor must wait a minimum of 45 days after purchase. After 45 days, users can access TreasuryDirect’s page on transferring securities and follow instructions on how to transfer their T-bonds to a bank, broker or qualified dealer to sell them.

Investors holding T-bonds in a bank or brokerage account can contact their bank or broker to notify them to sell the bonds or sell them directly on the secondary market from within their account.

Frequently asked questions (FAQs)