How to buy treasury bonds, one of the safest ways to invest for income (2024)

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• Treasury bonds, or Treasuries, are debt securities issued by the US government.
• Treasury bonds can be bought directly from the government's TreasuryDirect.gov website or through a brokerage or bank.
• Treasury bonds are prized by income-seeking investors because they are low-risk and highly liquid; however, they don't pay the highest interest rates.

When you're in need of funds, you take out a loan — that's what many people do and the US government is no exception to that.

In order to fund its operations and pay its bills, the federal government borrows money by selling bonds to investors. Issued through the Department of the Treasury, these bonds are known as Treasury securities or Treasuries for short. Like all bonds, they are debt securities that represent an obligation: They repay the investor's principal after a certain amount of time, along with interest along the way.

Treasury bonds are particularly popular among income-seeking investors because they are backed "by the full faith and credit" of the US Treasury — and by extension, the US government itself.

In particular, these securities are a good match for investors who are especially risk-averse or who are looking for a reliable source of income. Compared to other investments, Treasuries rarely pay the highest rates — they often lag high-quality corporate bonds by two percentage points, for example — but they pay. The US government has never defaulted on a debt.

How to buy Treasury bonds

Basically, there are two ways to buy Treasuries: new and used.

Buying from the US Treasury

If you're looking to buy newly issued T-bills, T-notes, or T-bonds, you can go straight to the source. The US Treasury allows individuals to invest through its Treasury Direct website. You don't need to be an accredited investor to do this; you don't even need to be a US citizen. However, you will need a US tax identification number — usually, it's your Social Security number — and email address to set up an account. You also need to have access to a bank account in order to fund your purchases.

Treasuries are sold via online auctions:

• T-bill auctions are held weekly
• T-note auctions are held monthly
• T-bond auctions are held four times a year: on the first Wednesday of February, May, August, and November.

At the auction, there are two ways to place a bid:

• Non-competitive bidding: If you're not an expert in securities trading, non-competitive bidding is probably the easiest way for you to buy a bond on your own. In this case, when you make a bid, you agree to accept whatever interest rate is decided at the auction. In return, though, you are guaranteed that your bid will be accepted and that you will be paid face value upon maturity.
• Competitive bidding: In competitive bidding, on the other hand, you specify the interest rate that you want to receive from the Treasury. But this method is more complicated because unless you're familiar with the supply and demand of the securities market, you likely won't know if your bid will be accepted. Here, your bid will only be accepted if it is less than or equal to the rate set by the auction.

The minimum requirement for buying a Treasury is usually $100 and goes up from there in increments of $100.

While a typical lot size for Treasuries is either $100,000 or $1 million, you can, of course, invest less than that. However, the maximum you can invest is $5 million.

Buying through a broker or bank

It's also possible to invest in Treasury securities through a financial institution, like a brokerage or bank. It's probably the easiest method since the broker will watch the US Treasury Department auctions and place your bid for you. However, depending on the institution, you may be charged a fee to place the bid.

The auctions, and TreasuryDirect, only offer new issues. So if you want to buy an older T-bill, note, or bond, you have to get one that's already trading on the secondary market (the major stock exchanges). You will need to buy through a brokerage or financial services company, or an online trading platform. Commission charges may apply.

You'll also need a brokerage or investment company to purchase a Treasury bond mutual fund or exchange-traded fund (ETF). The big advantage of choosing a fund, as opposed to the securities themselves, is that you can buy fund shares for a fraction of the bonds' price. And of course, with these funds — which own a basket of various T-bills, notes, and bonds — you get immediate diversification for the income portion of your portfolio.

What to consider before buying treasury bonds

1. Liquidity

The maturity date of the Treasuries that you invest in will determine how liquid (easily sellable) your investment will be. Treasury bills, which have maturities of a year or less, are going to be the most liquid option while 30-year bonds will give you the least liquidity.

That said, within the investment universe, Treasuries are pretty liquid animals: There's always a market for US government bonds. So you can always unload them pretty fast, though as mentioned earlier, the exact price they'll fetch depends on their coupon rate, compared to prevailing interest rates.

2. Risk vs. return

While no investment is 100% safe, Treasuries have a negligible level of risk. Since these securities are backed by the United States government, there's virtually no chance that you won't see a return on your investment. Despite ongoing concerns about the budget and deficits, the US has never defaulted on an obligation, in its entire history.

With that in mind, because there is less risk involved, the return you will receive is often not as great as with other income-oriented securities. The 30-year T-bond will generally pay a higher interest rate than shorter T-notes, to compensate for the additional risks inherent in the longer maturity.

3. Taxation

While you will have to pay federal income tax on them, Treasuries' interest is exempt from state and local taxes. This can be a benefit for investors living in high-tax jurisdictions.

You only pay taxes on the interest your T-bonds earn. When your bond matures, you don't owe anything, since it's just repayment of your own money. But if you sell a bond before it matures, it counts as a capital gain or loss, depending on whether you make a profit or not.

Should you buy a Treasury bond?

Treasury bonds, T-bills, and T-notes are the closest thing to a risk-free instrument out there. Their reliability makes them ideal for older investors dependent on investment income, or highly conservative ones who never want to risk their principal.

Since they don't offer growth or the sexiest returns, Treasuries usually don't play as big a role with younger investors. Still, they can be a great way to diversify anyone's financial holdings — balancing out that highly speculative stock, for example. By being folded into the asset mix, they can effectively reduce the overall risk of your portfolio.