Buying T-bills on the secondary market vs. at auction
- U.S. Treasury investments currently offer higher yields than in years past.
- Buying bonds directly from the U.S. government is free and relatively convenient.
- Buying Treasuries through a broker on the secondary market typically offers investors more control to trade and manage their bonds.
By Omar Anabtawi
What are Treasury securities?
U.S. Treasury bonds, notes and bills are the vehicles through which the U.S. government borrows money. These securities, considered among the safest investments globally because they’re backed by the U.S. government's full faith and credit, come in various forms:
- Treasury bills (T-bills): Short-term securities maturing in one year or less
- Treasury notes (T-notes): Medium-term securities with maturities from two to 10 years
- Treasury bonds (T-bonds): Long-term investments with maturities of up to 30 years
- Series I savings bonds (I bonds): Inflation-indexed bonds whose interest rates adjust with inflation
Are Treasury securities common investments?
Treasury securities are often used in diversified investment portfolios for their safety and liquidity. The Treasury market is one of the world's largest and most liquid financial markets. These securities often act as low-risk diversifiers, especially valuable in short-term investment strategies or as stabilizing factors during volatile market conditions.
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T-bills have become more attractive as a cash management tool in recent years. The Federal Reserve's interest rate hikes in 2022 and 2023 bolstered T-bill yields, making them an attractive source of income compared to other low-risk assets.
For a period, I bonds also gained more attention. They are government savings bonds designed to protect against inflation, with interest rates that adjust semi-annually based on inflation. Their interest rates peaked at nearly 10% in response to high inflation in 2021 and 2022. However, as inflation cooled, so did their popularity.
I bonds can only be purchased directly from the U.S. government through the TreasuryDirect system, can’t be resold, must be held for at least one year and redeeming before five years typically forfeits the last three months of interest.
How can I invest in Treasury securities?
You can buy Treasuries directly from the government through its online TreasuryDirect system or in the secondary market through a broker.
Here are the main routes to acquire Treasury securities:
- TreasuryDirect: This platform enables direct purchases from the U.S. government at auctions. It offers a range of both marketable and non-marketable securities.
- Marketable securities: These include T-bills, T-notes and T-bonds, which can be sold on the secondary market before they mature. The minimum investment for these securities is generally $100.
- Non-marketable securities: These include Series I and EE savings bonds, which cannot be sold in the secondary market. They must either be held until they mature or redeemed directly with the government. I bonds, for instance, have an annual purchase limit of $10,000 per Social Security number but offer the benefit of inflation-indexed returns.
- Secondary market: Buying existing bonds from other investors through brokers. This method offers more flexibility in terms of yield, price and timing.
- Funds: Treasury securities can also be accessed indirectly through exchange-traded funds (ETFs), mutual funds and money market funds. Funds often charge management fees but offer professional oversight and diversification.
How do I buy Treasuries directly from the government?
Purchasing Treasury bonds directly from the government involves participating in auctions conducted through TreasuryDirect. Here’s how it works:
- Register and set up: Investors must create an account on TreasuryDirect and link it to their bank account.
- Determine the auction types: There are two main types of auctions – competitive and noncompetitive.
- In competitive bidding, you specify the yield you’re willing to accept, which means you will not win the auction nor receive the bond if your bid yield is too high.
- Noncompetitive bidding generally guarantees you’ll receive the bond, but at the yield determined by the auction outcome.
- Placing a bid: During the auction, you can place your bid according to your preferred type. It’s crucial to understand that you might not always get the price you want in a competitive auction if your bid does not match the market sentiment.
Is it better to buy from TreasuryDirect or in the secondary market?
While TreasuryDirect offers the simplicity and security of buying directly from the U.S. government without fees, the secondary market can provide more control over the purchase yield, flexibility and visibility. Let’s explain how:
Yield vs. coupon: Maximizing returns
First, it's important to distinguish between a bond's coupon and its yield. The coupon is the fixed interest rate the Treasury pays, set at the bond's issuance, and remains unchanged until maturity. The yield, representing the actual return on the bond, varies with the purchase price. Buying bonds on the secondary market at prices below their par value can increase the yield, as investors pay less for the same coupon rate and receive the total par value at maturity. Bonds may trade below par due to shifts in the economy, market sentiment or interest rates.
Flexibility and control
One of the main benefits of buying bonds on the secondary market is flexibility. You can typically sell during market hours. To sell bonds purchased through TreasuryDirect, you must first transfer them to a broker, which can take several days, and market conditions can change significantly during that time. Non-marketable securities like I bonds can’t be transferred or resold.
Flexibility is crucial in dynamic financial markets where interest rates can fluctuate quickly. If rates rise, the market value of existing bonds with lower rates will generally fall. Speed matters for investors aiming to respond to changes in market conditions.
For investors who prefer not to manage their investments actively, considering a managed bond fund or professionally managed account could be more suitable. These options allow investors to benefit from professional management and oversight on the secondary market without having to monitor market movements closely or make frequent trading decisions themselves. Investors maintain the flexibility of the secondary market while outsourcing daily investment control.
Visibility
If you are a self-directed investor, keeping track of your entire portfolio is critical. When you buy bonds through a brokerage, they are held together with your other investments, allowing you to view your total asset allocation in one place. Seeing them together with your other investments helps you better understand your portfolio's overall performance and risk exposure and quickly respond to real-time market shifts.
The bottom line
In the modern investing world, there is no shortage of options for investing in U.S. Treasuries. TreasuryDirect offers a way to access savings bonds directly from the U.S. government. The secondary market provides advantages in yield potential, flexibility and control, making it an attractive option for self-directed investors who value having immediate oversight and the ability to react quickly to market changes. For those less inclined to actively manage their investments, exploring managed funds could provide a more hands-off approach while still participating in the bond market. Understanding these options will allow you to tailor your strategy to best meet your financial goals and preferences.
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