How to Buy Treasury Bonds

Treasury bonds are a safe and reliable investment that can diversify your portfolio. But they do carry risks like interest rate risk, and inflation risk.

Investors can buy T-bills, notes, and bonds through the federal government’s TreasuryDirect website or from a broker or financial institution. They are auctioned off at regular intervals in competitive and noncompetitive bids.

How to Buy

Buying Treasury bonds can help beginner investors diversify their investment portfolio and mitigate the risk of high-risk stocks. They are also a safe place to stash your money if you don’t want to be exposed to rising interest rates.

Treasuries are essentially loans that you make to the federal government, and you receive interest payments every six months until the bond matures and your principal is returned. These investments are considered to be of the highest credit quality, and the risk of default is low. Moreover, the interest earned from Treasury bonds is free of state and local taxes.

Investors can buy Treasuries directly through the U.S. Treasury’s website, Treasury Direct, or through an investment broker. You will need a social security number, an email address and access to a bank account that will fund your purchases. You can also purchase Treasuries through auctions held by the U.S. Treasury or through your investment broker using a non-competitive bid.

Types of T-Bonds

Treasury bonds are typically purchased by investors seeking a safe haven or looking to reduce the amount of risk in their portfolio. They may also be purchased by investors who are nearing retirement and want to increase their allocation of bonds compared to stocks.

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Purchasing T-Bonds can be done through a bank or brokerage firm that has access to the Treasury Automated Auction Processing System, known as TAAPS. Using this method requires the investor to pay a commission, which can be high if you are buying large amounts of bonds.

T-Bonds are sold at auction on the first Wednesday of February, May, August and November. During the auction, investors can choose between non-competitive or competitive bidding. With a non-competitive bid, you agree to accept whatever rate is decided during the auction; with competitive bidding, you can specify a rate, yield or discount margin you are willing to accept. T-Bond holders are exempt from paying local and state income tax on the interest they earn each year, but they do pay federal taxes on any gains over the original principal value.

Yield Curve

If you’re looking for a relatively safe way to earn interest, then Treasury bonds might be worth considering. But you need to understand the risks involved.

The yield curve is a graph that shows relationships between the bond yields of different maturities. Yield curves usually have a steep, upward sloping shape. The slope and shape of the yield curve depends on several factors, including investor expectations about future economic conditions and interest rates.

For example, if investors expect that short term interest rates will fall, then they’ll want to buy long-term Treasuries. This will push up the price of the bonds, as the ten-year Treasury will pay less interest than the three-month rate. Long-term Treasuries carry more risk than shorter-term ones because of this increased interest rate sensitivity. As a result, they tend to have lower yields. Investors should also consider tax implications when buying treasury bonds. They’re typically exempt from state and local taxes, but federal taxes are required on the interest earned.

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Taxes

Treasury bonds are a valuable addition to any investment portfolio, especially as you near retirement. These investments help balance out highly speculative stocks and other high-risk assets, and they offer steady returns over the long term.

When you purchase a T-bond, you’re lending money to the government and receiving interest payments in return. Once the bond matures, the principal, or par value, is returned to you.

Depending on the type of T-bond you invest in, you may be required to pay federal taxes every year. You can find out more about these taxes by viewing your 1099-INT in the TreasuryDirect account “Manage My Taxes” section early each year.

Some investors prefer to buy Treasuries through exchange-traded funds (ETFs). There are ETFs that target short-term Treasuries, longer-term Treasuries, TIPS and FRNs. These are traded like stocks and many qualify for commission-free trades. Some of these ETFs also make it possible to diversify your portfolio without the hassle of individual purchases.

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