Treasury bonds and bills are among the safest investments you can make. And with interest rates currently at their highest levels in years, it makes even more sense to hold these securities in your portfolio.
But you need to know how to buy treasury bonds and bills to make it happen. For example, is it better to buy T-Bills and bonds directly from the U.S. Treasury, from your bank, or through another means?
This article covers everything you need to know about buying Treasury bonds and bills.
Table of Contents
🔃 Updated June 2023 with latest results from Treasury auctions.
What are Treasury Bonds and Bills?
Treasury bonds and bills represent the debt obligations of the US government. Both the federal budget deficit and national debt are financed through US Treasury securities.
The Treasury sells the securities to individuals, institutions, agencies of the federal government, and the Federal Reserve. A large portion of these securities are purchased and held by foreign governments, institutions, and individuals as well.
Treasury bonds, bills, and other securities issued by the US Treasury are often collectively referred to as Treasury bills, Treasury bonds, or simply “treasuries.” Each term refers to all Treasury securities, regardless of type or maturity.
Such simple descriptions are convenient for casual discussions. But when it comes time to invest in Treasury securities, it helps to know the difference. Here are four types of U.S. Treasury securities:
Treasury Bills
- Available Terms: 4, 8, 13, 17, 26, and 52 weeks.
- Min. denomination: $100, then in additional increments of $100.
- Max. denomination: $10 million in a non-competitive bid or 35% of the offering amount in a competitive bid.
- Interest frequency: Paid at the maturity of the bill.
Treasury bills are short-term U.S. Treasury securities, maturing in one year or less. Interest rates are set at auction, with the amount paid as the difference between the cost of the security and its face value.
For example, you may pay $97 for a Treasury bill with a face value of $100. At the end of the term, you’ll be paid $100, with $97 representing the return of your principal and $3 as the interest earned on the security. Treasury bills can be held to maturity or sold before.
Competitive vs. Non-Competitive Bids
In a competitive bid, you specify the discount rate you are willing to accept. Your bid may be: 1) accepted in the full amount you want if the rate you specify is less than the discount rate set by the auction, 2) accepted in less than the full amount you want if your bid is equal to the high discount rate, or 3) rejected if the rate you specify is higher than the discount rate set at the auction.
Non-competitive bid: You agree to accept the discount rate determined at auction. You’ll be guaranteed to receive the bill you want and the full amount you want.
Treasury Notes
- Available Terms: 2, 3, 5, 7, or 10 years.
- Min. denomination: $100, then in additional increments of $100.
- Max. denomination: $10 million in a non-competitive bid or 35% of the offering amount in a competitive bid.
- Interest frequency: Paid every six months until maturity.
Treasury notes work similarly to Treasury bills but differ in their terms. Notes are intermediate securities, between bills and bonds, with terms ranging from two to ten years.
One major difference between Notes and Bills is that where Bills are sold at a discount and pay interest on maturity, Notes pay interest on the face amount of the security every six months, making them a reliable source of ongoing interest income.
Treasury Bonds
- Available Terms: 20 or 30 years.
- Min. denomination: $100, then in additional increments of $100.
- Max. denomination: $10 million in a non-competitive bid or 35% of the offering amount in a competitive bid.
- Interest frequency: Paid every six months until maturity.
Treasury bonds are the long-term version of Treasury securities. Similar to corporate bonds, they are issued in terms of 20 or 30 years. Treasury bonds are a good way to lock in a specific interest rate for a very long time. And much like Treasury notes, they are a source of regular interest income.
Treasury bonds do carry some risk due to fluctuations in interest rates. While the full principal value of the bonds will be paid upon maturity, the market value of the securities can rise and fall with changes in prevailing interest rates. This phenomenon is commonly referred to as interest rate risk.
When prevailing interest rates rise above the note rate on your bond, the market value of the bond declines. When prevailing interest rates drop below, the market value of the bond increases. That means you can incur either a capital loss or a capital gain if you sell a Treasury bond before it matures.
Treasury Inflation-Protected Securities (TIPS)
- Available Terms: 5, 10, or 30 years.
- Min. denomination: $100, then in additional increments of $100.
- Max. denomination: $10 million in a non-competitive bid or 35% of the offering amount in a competitive bid.
- Interest payment frequency: Every six months until maturity.
TIPS are somewhat of a hybrid between notes and bonds, but they serve a very different purpose. While other Treasury securities are designed to provide interest income and protection of principal, TIPS also offer inflation protection.
TIPS pay a certain fixed interest rate. But they also add a principal adjustment based on changes in the Consumer Price Index. If the CPI increases by 5%, you’ll earn your stated interest rate plus 5% on your TIPS for that year. But there is also a downside protection. If the CPI goes negative, you won’t be hit with a principal reduction.
TIPS are a popular way to protect savings and portfolios from the damage caused by inflation.
Why Invest in Treasury Bonds and Bills?
- Safety of principal. U.S. Treasury securities are considered the safest investments in the world. That’s because they are issued by and backed by the full faith, credit, and taxing power of the US government. They are frequently held by banks, other institutions, and foreign governments to hold cash assets safely.
- Exempt from state and local income taxes. While U.S. Treasury security interest is taxable at the federal level, it’s exempt from state and local income taxes. This can be a major advantage if you live in a state with a high income tax rate.
- High liquidity. Because they are so safe and widely held, there is a broad market for U.S. Treasury securities, so they can always be sold or liquidated.
- Interest rates. Though it isn’t always true, interest on U.S. Treasury securities is higher than what is available with most high-yield savings accounts and even certificates of deposit. This is particularly true of shorter-term securities.
As you can see from the table below, a three-month U.S. Treasury bill is currently paying 5.44%, while a 30-year Treasury bond is paying just 3.87%.
Sample interest rates being paid on US Treasury securities as of July 3, 2023, are as follows:
| Security Type | Term | Annual Percentage Yield (APY) |
|---|---|---|
| Treasury Bill | 1 month | 5.27% |
| Treasury Bill | 2 months | 5.40% |
| Treasury Bill | 3 months | 5.44% |
| Treasury Bill | 6 months | 5.53% |
| Treasury Bill | 1 year | 5.43% |
| Treasury Note | 2 years | 4.94% |
| Treasury Note | 3 years | 4.56% |
| Treasury Note | 5 years | 4.19% |
| Treasury Note | 7 years | 4.03% |
| Treasury Note | 10 years | 3.86% |
| Treasury Bond | 20 years | 4.08% |
| Treasury Bond | 30 years | 3.87% |
The Risks of Investing in Treasury Bonds and Bills
Despite the advantages of investing in Treasury bonds and bills, there are some risks you need to be aware of.
- Interest rate risk: We covered this under the discussion of Treasury bonds, but it can also pertain to longer-term notes. It means simply that when interest rates rise, the market value of your securities falls.
- Opportunity cost: US Treasury securities are safe investments. But that also means you can usually get higher returns on risk-oriented assets, like stocks and real estate. Money held in Treasury bonds and bills will never have the potential of double-digit gains, like other assets.
- Inflation: Despite the current high rates being paid on Treasury bonds and bills, the rates of return have generally lagged behind inflation. High interest rates can mask this reality.
How to Buy Treasury Bonds and Bills
There are two primary ways to buy Treasury bonds and bills, either through U.S. Treasury Direct or a bank or brokerage. A third type – Treasury funds – are available through either brokers or investment fund companies. Let’s take a look at each purchasing method.
U.S. Treasury Direct
You can open an account and purchase Treasury bonds and bills directly through the Treasury’s online investment portal, Treasury Direct. Securities can be purchased with no fees or commissions and either held on the platform or liquidated at any time.
To open an account, you’ll need to be a US resident, a US citizen living abroad, or a civilian employee of the US government. Individuals must be at least 18 years old, but accounts can also be opened by trusts and estates (but not business entities). You’ll also need to furnish your Social Security number, email address, and US address.
Just as is the case with a brokerage account, you’ll need to connect your bank account to your Treasury Direct account. You will need a minimum of $100 to participate in any investment offered. Also, be aware that Treasuries are available only in electronic form. The Treasury no longer issues paper certificates.
Securities can be purchased by logging into your account and selecting BuyDirect, then clicking on the specific security you want to buy.
You can hold your securities on Treasury Direct until they mature. At that time, you can either accept cash for the security or roll the proceeds over into new securities. But if you want to sell them before maturity, you’ll need to transfer them to a bank or broker. To do this, you’ll need to complete a Transfer Request Form, which is available on Treasury Direct.
Through a Bank or Broker
U.S. Treasury securities can often be purchased at banks. You’ll need to refer to the guidelines for the purchase of the securities at your bank of choice.
Many online brokerage firms offer U.S. Treasury securities. Large firms, like Charles Schwab and Fidelity, charge either a small commission on the securities or even none at all. You can purchase either the Treasury securities of your choice or invest in one of the many investment funds that specialize in Treasuries (Treasury funds, see below).
A major advantage of investing in Treasuries with a broker is that it will not require a special account, as is the case with Treasury Direct. You can hold your Treasury securities in the same account with other assets. That will make moving funds between different securities quicker and easier.
Treasury Funds
These days it seems there is a fund – a mutual fund or an exchange-traded fund (ETF) – for virtually every asset class. That includes U.S. Treasury securities. They can be purchased either through investment brokers or fund families, like Vanguard, iShares, and many others.
Not surprisingly, U.S. Treasury security funds are highly specialized. For example, if your preference is to invest in 10-year notes, you can choose the US Treasury 10-Year Note ETF (UTEN). But if you’d rather invest in bonds, you can go with the Vanguard Long-Term Treasury ETF (VGLT).
And if you’re not sure which way you want to go, you can invest with a general Treasury fund, like iShares U.S. Treasury Bond ETF (GOVT).
Funds, ETFs in particular, can be bought and sold just like individual stocks. They can be purchased at minimum denominations of the cost of one share or even a fraction of a whole share.
Should You Buy Treasury Bonds and Bills?
U.S. Treasury bonds and bills are among the safest investment securities available and should be included in most investors’ portfolios. Exactly how much will depend on your personal investment risk tolerance. If you prefer more conservative investments, a larger percentage of your portfolio should be in Treasury securities.
They’re also an excellent choice if you are saving money for a specific purpose – like a down payment on a house – and want to earn high interest while maintaining principal safety.
