When you’d like to invest for a guaranteed return, I Bonds are a good option (see How to Buy I Bonds). However, the government imposes an annual purchase limit on savings bonds. After you buy all the I Bonds you’d like to buy, if you still would like to invest a sum of money for a fixed term, buying CDs directly from a bank or credit union used to be the answer but that isn’t necessarily the case today.
Treasuries Beat CDs Now
When the Federal Reserve started raising interest rates, the financial markets responded right away. Banks and credit unions are still slow to raise the rates they pay on savings accounts and CDs because they don’t need more deposits and they take advantage of people’s inertia and ignorance of the going rates.
In addition, Treasury securities have low credit risk because they are guaranteed by the full faith and credit of the United States government. They require a low minimum investment of only $1,000. The term can be as short as four weeks. The interest is exempt from state and local income taxes. You can buy them in your existing brokerage account as opposed to having to open a new account at a bank you aren’t familiar with. Why in the world would someone buy CDs from banks and credit unions that pay a lower yield than Treasuries?
Because investors don’t know they can buy Treasuries so easily for a higher yield than CDs at this moment.
When you already have a TreasuryDirect account for I Bonds, you can use the same account to buy regular Treasuries but it’s easier to buy them at a broker. You can buy new-issue Treasuries through major brokerage firms Fidelity, Vanguard, Charles Schwab, TD Ameritrade, and E*Trade with no fee whatsoever. Also, you can buy them in your Traditional or Roth IRA at the broker, whereas TreasuryDirect doesn’t offer IRAs.
Although you can buy Treasuries at any time on the secondary market (see How to Buy Treasury Bills & Notes On the Secondary Market), I prefer to buy new-issue Treasuries because you don’t have to pay a bid/ask spread when you buy new issues. While the bid/ask spread may be small, it just isn’t necessary to pay it when you have the opportunity to buy a new issue.
This is the case especially for short-term Treasuries maturing in six months or less because a new issue comes out every week. Paying a bid/ask spread once to buy a 10-year Treasury and holding it for 10 years may be OK but paying a bid/ask spread every month adds up fast.
The yield you’ll receive on a new-issue Treasury is determined by an auction process but you don’t have to make any bids. You only say how much you’d like to buy in your order. The banks will do the competitive bidding and you ride their coattails. You get the same yield for your tiny $1,000 order as a bank buying $100 million.
You can get a feel of where the yield might land by checking Interest Rate Statistics on TreasuryDirect (click on the first heading on the page for Daily Treasury Par Yield Curve Rates).
Treasury bills (“T-Bills”) with a maturity of one year or shorter are sold at a discount to par value. You pay slightly less than $1,000 for each $1,000 bill. You automatically receive the full $1,000 in your brokerage account when the bill matures. The difference is your interest.
Treasury notes (“T-Notes”) and Treasury bonds (“T-Bonds”) with a maturity of two years and above are sold at slightly less than the face value. You receive interest payments in your brokerage account every six months, and the full face value will show up automatically in your brokerage account when it matures. You don’t need to sell or do anything when you hold Treasuries to maturity.
Minimum Order Size
The minimum order for a new-issue Treasury is $1,000 in face value when you buy it in a brokerage account. You can order in $1,000 increments up to $5 million in face value.
The minimum order for a new-issue Treasury is $100 in face value when you buy it at TreasuryDirect. You can order in $100 increments up to $5 million in face value. Because you can’t sell Treasuries in your TreasuryDirect account before they mature (must hold to maturity or transfer to a brokerage account), it’s easier if you buy them in a brokerage account.
You only need to know when the U.S. government will sell a new batch of Treasuries next time. Right now the government sells shorter maturities weekly and longer maturities monthly. You won’t have to wait long for the next sale unless you’re buying TIPS.
|4-week, 8-week, 13-week, 17-week, 26-week||Weekly|
|52-week, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, 30-year||Monthly|
|5-year TIPS||Four times a year (April, June, October, December)|
|10-year TIPS||Six times a year (January, March, May, July, September, November)|
|30-year TIPS||Twice a year (February, August)|
The exact dates are published in the Tentative Auction Schedule from the U.S. Treasury. The schedule lists three dates — the Announcement Date, the Auction Date, and the Settlement Date. You only need to pay attention to the first two dates to know the window for placing your order.
You place your order between the afternoon of the Announcement Date and the night before the Auction Date. For example, if you’d like to invest a sum of money for two years, the schedule shows a 2-year note will be announced on a Thursday and it will be auctioned the next Tuesday. You will see it offered at your broker in the afternoon on the Announcement Date (Thursday). You should have your order in by Monday night, before the Auction Date (Tuesday).
So check the sale schedule and set a calendar reminder for yourself to place the order within the order window. If the term you want isn’t available as a new issue or if you don’t want to wait, you’ll have to buy it on the secondary market. See How to Buy Treasury Bills & Notes On the Secondary Market.
When It Matures
If you hold the Treasury to its maturity, you don’t have to do anything extra. The face value will magically appear in your brokerage account as cash when the bond matures.
Some brokers offer an optional “auto roll” feature for reinvestments. If you enable the “auto roll” feature when you buy the Treasury, the broker will automatically use the money from the matured Treasury to buy another new-issue Treasury of the same face value and the same term.
Selling Before Maturity
If you need to sell before the Treasury matures, you can try to sell it online at any time through the broker. The price will be at the market price at that time, which may be higher or lower than your original purchase price.
Sometimes bond dealers aren’t interested in buying from you when you have less than $100,000 in face value to sell. If you see that online prices require a higher minimum than the amount you have, you can wait an hour or two to see if a quote for a lower minimum comes up. Or you can call the broker and ask for help from the fixed income department. They have additional ways to sell the bonds for you. You may have to pay a fee for the broker-assisted trade.
Selling before maturity in a taxable account can make your taxes more complicated. Try to avoid selling before maturity in a taxable account.
When you buy Treasuries in a taxable brokerage account, the brokerage firm will send you the necessary tax form for your taxes after the end of the year. The gains are taxed as ordinary income, not as a capital gain. If you do your taxes with tax software such as TurboTax, the tax software will handle the tax calculation. You only pay federal income tax on the interest. The interest income on Treasuries is exempt from state and local taxes.
When you buy Treasuries in a tax-advantaged account such as a Traditional IRA, a Roth IRA, or an HSA, the tax treatment goes by the account type. The interest isn’t immediately taxable. The eventual withdrawals will be subject to the usual rules and restrictions associated with the account type.
Here are the steps for placing an order for new-issue Treasuries with Fidelity.
Under News & Research on the top, click on Fixed Income, Bonds & CDs.
Click on the New Issues tab. You pay no extra fee only when you buy a new issue (you must pay a bid/ask spread when you buy on the secondary market).
You’ll see a list of upcoming issues in the Treasury section. If you don’t see anything for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window. If you don’t see the new Treasury offered on the Announcement Date, wait a few more hours. It’ll show up later in the day.
You’ll see the maturity date of each issue and an expected yield. The expected yield is only an estimate. Ignore the estimate. You’ll get the actual yield from the auction. You won’t know what it is until after your order executes but you can be sure you’ll always get the best yield determined by the market. Click on Trade to buy the issue you are interested in.
You may see either the “old” order entry screen or the “new” order entry screen next. Either one works. Only the look and feel are different.
Treasuries are sold in $1,000 increments in a brokerage account. Enter a quantity of 1 if you’d like to buy $1,000 in face value. It will cost slightly less than $1,000 when it’s all said and done. Fidelity lets you set up Auto Roll to automatically buy another Treasury of the same term and the same amount when this Treasury matures. It’s convenient when you’re investing in short-term Treasury Bills.
If you turn on Auto Roll, when it’s time to roll to the next one, you may receive an email saying you don’t have enough cash in your account to cover the new purchase. Don’t worry. The matured Treasury will cover the new purchase just in time. See comments from Mapleton Reader.
Again, there is no fee whatsoever from Fidelity when you buy new-issue Treasuries (you must pay a bid/ask spread when you buy on the secondary market). Have cash ready in your account. You’ll have Treasuries when the auction settles.
Follow these steps to buy new-issue Treasuries in a Vanguard brokerage account.
Click on the three dots next to Transact near the top right of your account and scroll toward the bottom. Click on Trade bonds or CDs.
Click on the Treasuries tab and then the Auction radio button. Be sure to select “Auction.” You pay no fee or bid/ask spread only when you buy a new issue (you must pay a bid/ask spread when you buy on the secondary market).
You will see a list. The Treasuries available for accepting orders will have a Buy link. If you don’t see a Buy link for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window. If the Buy link isn’t activated yet on the Announcement Date, wait a few more hours. It’ll show up later in the day.
Vanguard shows an Indicative Yield on the right. That’s just an estimate. Ignore the estimate. You’ll get the actual yield from the auction. You won’t know what it is until after your order executes but you can be sure you’ll always get the best yield determined by the market.
Vanguard goes by the face value on the order page. Your order amount must be in $1,000 increments with a minimum of $1,000 and a maximum of $5 million. Vanguard doesn’t offer the Auto Roll feature. Similar to Fidelity, there is no fee whatsoever from Vanguard when you buy new-issue Treasuries (you must pay a bid/ask spread when you buy on the secondary market).
You can buy new-issue Treasuries at Charles Schwab as well. There is also no fee whatsoever from Schwab (you must pay a bid/ask spread when you buy on the secondary market). I don’t have an account with Schwab but a reader sent me these screenshots from their account.
Click on Trade in the top menu and then Find Bonds & Fixed Income.
Click on New Issues.
Choose Treasury Auctions in the Bond Type dropdown.
You will see a list of issues available for new orders. If you don’t see anything for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window. If you don’t see the new Treasury offered on the Announcement Date, wait a few more hours. It’ll show up later in the day.
Your order must be in $1,000 increments. If you turn on the Auto-Rollover feature, Schwab will automatically enter a new order for the same term and the same amount when this Treasury matures. If you leave the Auto-Rollover feature off, you’ll just have cash when this Treasury matures.
Charles Schwab limits the Auto-Rollover feature to Treasury Bills with a maturity of six months or shorter. There’s a one-week gap between the maturity of a Treasury Bill and buying a new Treasury Bill with the proceed. Fidelity doesn’t have this six-month limitation or the one-week gap.
TD Ameritrade has been acquired by Charles Schwab. It still has its own interface for now. I don’t have an account with TD Ameritrade but reader David gave these steps in a reply to comment #101:
Trade -> Bonds & CDs
Click on any % link. From the left menu select “New Issues”
Under Treasury Auctions, click to show all.
The bills and notes are listed, showing you when the auction date is. You can put in your order the day before or morning of the auction date.
E*Trade’s commission schedule says their fee is $0 for buying new-issue Treasuries but I don’t have screenshots of how to do it because I don’t have an account with E*Trade.
Merrill Edge doesn’t support buying new-issue Treasuries online. Their fee schedule says that placing an order by phone with a representative costs $30 but people have reported not being charged a fee. Confirm with the representative that you won’t be charged a fee if you decide to buy by calling in.
You can buy Treasuries on the secondary market online without a fee at Merrill Edge. See How to Buy Treasury Bills & Notes On the Secondary Market.
Because I know I’ll get the best yield in an auction and it’ll be water under the bridge post-auction anyway, I don’t bother to check what exactly the yield was after the auction. If you’d like to know what you got from your purchase, you can check the auction result after 2 p.m. Eastern Time on the Auction Date on the Announcements, Data & Results page at TreasuryDirect.
The results for Treasury Bills (1-year or shorter) list a High Rate and an Investment Rate. The two numbers are just different calculations for the same result. The Investment Rate is comparable to the Annualized Percentage Yield (APY) on a commercial CD.
The results for Treasury Notes and Bonds (2-year or longer) list a High Yield and an Interest Rate. The High Yield is the yield you got from your order. The Interest Rate is the annualized rate at which you will receive interest payments every six months. If the Interest Rate is 4%, you will receive $20 in interest for each $1,000 face value every six months ($1,000 * 4% / 2).
Buying new-issue Treasuries in a brokerage account comes down to:
- Check the current rates and decide how long you will invest the money.
- Check the auction schedule to see when the next sale for your desired term will come up.
- Set a calendar reminder to place your order within the order window.
- Have cash ready to go in your account.
- Place your order. Wait for the auction and settlement.
- Check the auction result only if you’re curious.
- (2-year Treasury Notes and up) Automatically receive interest as cash in your account every six months.
- Automatically receive the face value when it matures.
You can also buy “pre-owned” Treasuries on the secondary market but you’ll have to pay a bid/ask spread there. You’re better off waiting for a new issue unless the term you want to buy isn’t available as a new issue — for example, no 9-month or 4-year terms are offered as a new issue — or if the next auction for a new issue is too far off in the future. Please read How to Buy Treasury Bills & Notes On the Secondary Market if that’s the case.
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