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The following post is by MPFJ staff writer, Kevin Mercadante, who is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
If you’re looking for a way to escape turmoil in the financial markets, there’s no better place to be than cash. If you’re looking for cash-type investments, there’s no better and safer place to be than in U.S. Treasury securities. And, if you’re looking to buy and hold U.S. Treasury securities, there’s no better way to do it than with Treasury Direct.
With Treasury Direct, you can buy and hold U.S. Treasury Securities directly from the U.S. Government in denominations as small as $100.
How to buy through Treasury Direct
You start by setting up an account on Treasury Direct called a Treasury Securities Account, and you can do this by clicking “open an account” on the website. You’ll be required to provide your Social Security number, email address, and bank account and bank routing numbers.
Purchasing a Treasury bill is called “bidding”, and they’re purchased at a discount. The difference between what you pay—the discount—and the bill’s face value is your return, or interest paid at maturity. For example, the face value of a bill is $1,000, but you purchase it for $990. When the bill matures, you’re paid the $1,000 face value which includes your purchase price of $990, plus $10 which represents the interest portion.
There are two types of bids you can use, but when you use Treasury direct, you can only use a non-competitive bid. Under this type of bid, you accept what ever discount the discount rate is as determined by the Treasury auction. You will be guaranteed to receive the security you want in what ever quantity you choose.
The second type of bid is a competitive bid, and this is available only through a bank, broker or dealer. Under this type of bid, you specify the discount rate you want. You may or may not get the discount you want and even if you do, it may be less than what you want.
When you buy a security, the funds for the purchase are withdrawn from your bank account. And when the security matures, the funds will automatically be deposited back into your bank account. You can also set up your Treasury Direct account to automatically roll over funds from one security to another at maturity.
Types of Treasury securities available through Treasury Direct
With a Treasury Direct account, you can purchase the following Treasury securities:
- U.S. Savings Bonds
- U.S. Treasury bills (in maturities of 4, 13, 26 and 52 weeks)
- U.S. Treasury Notes (in maturities of 2, 3, 5, 7 and 10 years)
- U.S. Treasury Bonds (30 year maturities)
- TIPS – Treasury Inflation Protected Securities
Selling your Treasuries
When you buy Treasury securities through Treasury Direct, you will have to hold them until they mature if you hold them with Treasury Direct after purchase. Though it’s easy to buy Treasuries through Treasury Direct, the program is set as a way to buy and hold the securities to maturity.
Selling is trickier, but no worse than how you would handle it anywhere else you would sell them. In order to sell a Treasury security that is being held with Treasury Direct, you will either need to move it out of the program, or you can sell it in the account through the Federal Reserve Bank of Chicago (there will be a fee for this). Treasury Direct itself does not act as a secondary market for its securities.
Why not go through a bank, broker, or mutual fund?
There are different accounts you can buy Treasury securities through, but Treasury Direct has some strong advantages over the alternatives.
- No transaction fees. Some institutions charge fees for handling treasury transactions, but even those that don’t skim will skim some out. An institution can instead buy the securities at a given price then sell them to you at a slightly higher price. Mutual funds typically have management fees and other fees that they charge on your account, even if it’s a “no load” fund. No matter how it’s handled, you will pay some sort of fee for the service. With Treasury Direct, there is no fee—you’re dealing direct. Considering today’s extremely low interest rates, a fee that’s no more than a small sliver of 1% can make a difference, especially over the long run.
- No risk of institutional failure. Since you aren’t using an intermediary to buy and hold your securities, there is no risk of institution failure. The securities are held with the US Treasury, which are backed by the full faith and credit of the United States Government.
- Set your own maturity allocations. This applies mostly to mutual funds, but when you invest in treasuries through a mutual fund, your maturity allocations will be established by the fund—you’ll have no ability to change that. But let’s say that you believe that interest rates will soon rise, and instead of having the 20% allocation in 26 week treasury bills the mutual fund has, you want to have 80%. With Treasury Direct, you can do that. In fact, you can have any allocation you like. And here’s something else about mutual funds: very few are true pure plays. A fund that invests primarily in Treasury securities may also hold small positions in derivatives and other non-Treasury investments.
Have you ever used Treasury Direct for your fixed income investments? If so, did you find the system pretty easy to navigate?
If not, what do you use as a ‘house’ for your fixed income investments?
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