In the current economic environment, a good entry point for a new type of investment can be difficult to pinpoint.
While the stock market has performed well so far in 2023 compared to last year, a recession could still be on the horizon. Risk-averse beginner investors who are nervous about losses may be reluctant to jump in.
Emerging investments such as cryptocurrency, which fueled excitement among both beginner and advanced investors and looked to some to be “the next big thing,” have been plagued of late by high-profile scandals, though big-name cryptos such as Bitcoin and Ethereum are up big so far in 2023.
Treasury bonds, also known as T-bonds or Treasurys, are viewed as safer than stocks, cryptocurrency and exchange-traded funds, or ETFs, because they are backed by the U.S. government. Treasury bonds could be a smart addition to your investing portfolio now because of the current market uncertainty, as they’ll provide some return on your investment as opposed to keeping funds in cash. Here are some tips on buying Treasury bonds and the different options available:
— Why now is a good time to buy Treasury bonds.
— Treasury bonds vs. other Treasury securities.
— Best way to buy Treasury bonds directly.
— Steps to take to buy Treasury bonds.
— Other ways to invest in Treasury bonds.
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Why Now Is a Good Time to Buy Treasury Bonds
Treasury bonds, or T-bonds, are government-backed debt securities issued by the U.S. government. T-bonds earn interest over 20 or 30 years. The only way an investor could lose their investment would be if the U.S. government were to default. While a U.S. default seems unlikely, it’s not out of the realm of possibility due to fraught debt limit negotiations in recent years.
Bond yields are relatively high right now, and therefore have the potential to generate greater returns over the long term. For example, the 20-year U.S. Treasury bond reached a 4.9% yield on Sept. 28 — up from 4.06% on Jan. 3.
Treasury Bonds vs. Other Treasury Securities
When investing in Treasury bonds, you can choose from either a 20- or 30-year maturity, with a minimum purchase of $100. Interest is paid to investors every six months until maturity, and there are no state and local taxes on the interest. However, you will pay federal taxes on the interest earned.
In addition to Treasury bonds, you can purchase other Treasury investments such as Treasury notes; Treasury bills; Treasury inflation-protected securities, or TIPS; and floating-rate notes, or FRNs. Treasury bonds and the other Treasury securities are considered marketable securities, meaning that they can be transferred to someone else and sold before they mature.
Non-marketable securities are registered to one person’s Social Security number. They can’t be sold or transferred to someone else. Some examples of non-marketable securities are EE and I savings bonds.
Here’s a breakdown of each marketable security and the key differences from Treasury bonds:
Treasury Note
This type of investment can be purchased for a term of two, three, five, seven or 10 years, while Treasury bonds have a 20- or 30-year maturity term. Treasury notes are like Treasury bonds in that they pay interest every six months, and the investor is only required to pay federal taxes.
Treasury Bills
When looking to invest in Treasury bills, you can purchase a minimum four-week and up to 52-week investment. A key difference between T-bills and Treasury bonds is that bills can be sold at a discount or at par (face value). However, when a bill matures, you are paid its face value.
Treasury Inflation-Protected Securities
Investors looking to hedge against inflation might add Treasury-inflated protected securities, or TIPS, to their investing portfolio. In comparison to a Treasury bond, there are several key differences, one being that TIPS are sold in increments of five, 10 or 30 years. Unlike a Treasury bond, which has a principal that is fixed, the principal of a TIPS can vary over the lifespan of the investment.
Once the investment matures, you receive an amount that is either higher than or equal to your initial investment, whichever is greater and never less than the original principal. Interest is paid every six months, though the payment amount can vary, unlike the fixed-interest payments seen with Treasury bonds.
Floating-Rate Notes
FRNs are unique in comparison to Treasury bonds as they mature in two years, pay interest four times a year and have an interest rate that may change, or “float,” over time. The interest rate for a FRN is determined by adding together an index rate and a spread.
The index rate is tied to the highest accepted discount rate of the most recent 13-week Treasury bill. The spread is the highest accepted discount margin at the auction when the FRN is first offered.
[READ: 5 Great Fixed-Income Funds to Buy Now]
Best Way to Buy Treasury Bonds Directly
The best way to buy Treasury bonds is through TreasuryDirect, a broker or a bank. Before you purchase T-bonds through TreasuryDirect, you will need to set up an account and provide your Social Security number. As an investor, you can participate in debt auctions that will allow you to purchase debt securities including Treasury bonds.
If you decide to use a broker or bank, you will have to purchase Treasury bonds in the secondary market. In the secondary market, you can purchase older Treasury bonds, in comparison to new issues coming directly from the U.S. government on TreasuryDirect.
Steps to Take to Buy Treasury Bonds
TreasuryDirect
1. Create your TreasuryDirect account to purchase securities.
2. Select the Buy Direct tab.
3. Follow the prompts to choose a Treasury bond, the amount you want to buy and complete the required information.
4. Place your bid to buy a Treasury bond.
Bank
1. Create the appropriate account with your bank to purchase Treasury bonds.
2. Specify with the bank whether you are placing a competitive or non-competitive bid.
3. Place your bid to buy a Treasury bond.
Note:When placing competitive bids, you might not receive all the Treasury bonds listed due to availability and the market price.
Broker
1. Open a brokerage account with a company that has access to the Treasury Automated Auction Processing System (TAAPS).
2. Place your bid and allow the broker to buy Treasury bonds directly through the TAAPS system.
Note: When purchasing Treasury bonds from a bank or broker, you are bidding within an auction. Before you place a bid, you must specify the discount rate, yield or discount margin you are willing to accept. Also, you will pay a commission to use this service from a bank or broker.
Other Ways to Invest in Treasury Bonds
If you don’t want to buy Treasury bonds directly, you can find them within mutual funds. Many mutual funds include stocks, bonds and other investments along with Treasury bonds. You can also purchase Treasury bonds via ETFs, which trade like stocks.
As a beginner looking to invest for the long term, buying Treasury bonds can be a great way to hedge against risk in the stock market. Also, Treasury bonds may provide you a better return on your investment compared with savings accounts and other safe places to stash your cash.
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How to Buy Treasury Bonds originally appeared on usnews.com
Update 09/29/23: This story was previously published at an earlier date and has been updated with new information.
