How to Buy Treasury Bonds: A Step-by-Step Guide | Investing

When you buy a Treasury bond, you’re essentially lending money to the federal government. In exchange, the Treasury agrees to pay you interest every six months and return the bond’s face value when it matures. The interest rate stays fixed throughout the bond’s life.

Treasury bonds are considered one of the safest investments around because they’re backed by the full faith and credit of the U.S. government, which has never defaulted on its debts.

However, their market value can fluctuate, and inflation can eat into your returns.

“Treasurys can’t default, but they can lose money,” says Jeff Judge, a CFP and managing partner at Chesapeake Financial Planners in Forest Hill, Maryland. “Most investors learn that the hard way.”

Buying Treasury bonds can help insulate your portfolio from volatility generally associated with stocks, and doing so is relatively straightforward. Here’s a rundown:

There are three ways to invest in U.S. Treasury bonds:

The government also sells shorter-term bills and notes. The biggest differences are how long they last and when they pay interest.

Treasury bonds, or T-bonds, are designed for long-term investing. Their fixed payments can provide income for decades.

Treasury bills, or T-bills, are short-term securities that typically sell for less than their face value. Instead of receiving regular interest payments, you earn the difference between the purchase price and the amount paid at maturity.

Treasury notes, or T-notes, bridge the gap between bills and bonds, paying regular interest without requiring a 20-year commitment.

All three types can be sold before maturity, though by doing so, you might receive more or less than you originally paid.

“Selling early is how Treasury investors lose money,” says Judge.

The official federal government platform for buying and managing Treasury securities is TreasuryDirect.gov.

It’s free to open an account, and you’ll avoid fees and commissions. You’ll receive interest payments directly into your designated bank account, though selling early can be inconvenient.

TreasuryDirect began moving to ID.me – a third-party identity verification service used by other government agencies – in September. It replaces the old account-number, password and security-image login.

If you already have a TreasuryDirect account, you can connect it to an existing or new ID.me account. The old login method works through Oct. 28, but after that, ID.me will be required. If you miss the deadline, your investments won’t disappear, but you’ll need to complete verification to regain online access.

New to TreasuryDirect? Here’s what to do:

The Treasury sells bonds through regularly scheduled auctions. When you purchase bonds through TreasuryDirect, you submit a noncompetitive bid, meaning you agree to accept the yield determined at auction. In return, you’re guaranteed to receive the full amount of bonds you requested.

However, you won’t know the exact purchase price or yield until the auction ends. For newly issued bonds, the interest rate is also determined at auction.

Here’s how to buy Treasury bonds at auction:

Once your purchase settles, the bond will appear in your TreasuryDirect account.

If you’d rather manage everything in one place, you can also buy Treasury bonds through your existing brokerage account.

This approach offers more flexibility, though you might encounter transaction costs that don’t apply to TreasuryDirect.

The secondary market is where investors buy and sell Treasury bonds that have already been issued. Fidelity, Charles Schwab and Vanguard all let individual investors buy Treasury securities on their platforms.

Unlike TreasuryDirect auctions, you can browse available bonds and purchase them at current market prices.

To get started, navigate to your broker’s fixed-income or bond-trading section. Search for U.S. Treasurys, compare available maturities and yields, then place your order.

It’s important to pay attention to a bond’s yield to maturity, not just its coupon rate, says Jim Barnes, senior vice president and director of fixed income at Bryn Mawr Trust.

“The bond yield is the more relevant interest rate to look at to determine the bond’s value,” he says.

Yield to maturity accounts for the bond’s purchase price, interest payments and time remaining until maturity.

Bonds that trade at a discount will receive a below-market coupon rate for the life of the bond, says Barnes, but receive the full par value of the investment at maturity.

“Pay more than par and you earn less than the coupon suggests,” says Judge. “Pay less and you earn more.”

Instead of selecting individual bonds, you purchase shares of a professionally managed portfolio.

There are many different Treasury funds on the market. Some funds hold short-term Treasurys, while others focus on 20- or 30-year bonds.

An individual Treasury bond has a fixed maturity date when the government repays its face value, but most Treasury funds don’t work that way, says Judge.

“An ETF has no maturity date,” he says. “The fund keeps rolling into new bonds, so its price moves with rates every day and your principal never ‘comes home’ at par.”

That means you can’t simply hold a conventional Treasury ETF until a certain date and expect your original investment back. Instead, your return depends on changes in the fund’s share price and the income it pays along the way.

There are exceptions, including target-maturity Treasury ETFs, which are designed to wind down in a specific year.

Treasury funds are also sensitive to changing interest rates. When rates rise, fund prices generally fall. Longer-term Treasury funds are more sensitive to these rate changes.

Investors also need to consider the expense ratios these funds carry, along with a payout that shifts as holdings turn over, says Judge.

“The ETF wins on convenience – easy to trade, easy to hold in an IRA,” says Judge. “But TreasuryDirect wins on certainty.”

Treasury interest is subject to federal income tax but exempt from state and local income taxes. Treasury ETF and mutual fund distributions may qualify for similar state tax treatment, but it depends on the fund’s holdings and your state’s rules.

You’ll generally owe federal income tax on interest received each year, even if you reinvest the payments.

One of the biggest downsides of Treasury bonds is interest rate risk. When rates rise, older bonds with lower coupon rates become less attractive, causing their market prices to fall.

“Longer-maturity bonds will have more price risk and the potential for greater losses in a rising interest rate environment,” says Barnes.

There’s also inflation risk. A fixed 4% interest rate won’t look nearly as attractive if inflation climbs to 5% or 6%.

Liquidity can also be a concern. You can’t sell bonds directly through TreasuryDirect – you’ll need to transfer them to a broker first. And newly purchased securities must remain in your TreasuryDirect account for at least 45 days before you can transfer them out.

You can also lose money if you don’t hold your bonds to maturity, a situation Judge witnessed with a client who bought long-dated Treasurys right before rates climbed in 2022.

“The price fell, and he sold the Treasurys to fund a home repair,” says Judge. “Losses locked in. If he’d held to maturity, he’d have gotten his principal back – he just couldn’t wait that long.”

“Match maturities to when you need cash,” he says. “Or, build a bond ladder so some bonds mature every year.”