Buying T-bills on the secondary market vs. at auction

By Omar Anabtawi

What are Treasury bonds?

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 due to being backed by the U.S. government's full faith and credit, come in various forms:

Are Treasury bonds common investments?

Treasury securities are often found in diversified investment portfolios due to 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.

T-bills have become significantly more attractive as a cash management tool over the past few 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, Series 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 over 9% in response to high inflation in 2021 and 2022.  However, as inflation cooled, so did their popularity.

Series 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 impose a penalty if redeemed before five years. As Series I bond yields normalized closer to the yields of regular Treasuries on the secondary market, investors lost motivation to overcome the relatively higher logistical challenges of buying Series I bonds through TreasuryDirect.

How can I invest in Treasury bonds?

You can buy Treasury bonds directly from the government through their online TreasuryDirect system or in the secondary market through a broker.

Here are the main routes to acquire Treasury securities:

How do I buy bonds directly from the government?

Purchasing Treasury bonds directly from the government involves participating in auctions conducted through TreasuryDirect. Here’s how it works:

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 paramount benefits of buying bonds on the secondary market is flexibility. You can sell your assets any time during market hours. To sell bonds purchased through TreasuryDirect, you must first transfer them to a broker, which can take several days during which time market conditions can change significantly. Non-marketable securities like Series 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 the need 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 to capture opportunities and mitigate losses.

The bottom line

In the modern investing world, there is no shortage of options for investing in U.S. Treasuries. TreasuryDirect offers a unique 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 meet your financial goals and preferences best.

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