How to Purchase US Treasury Bonds and Bills

Every week there is more fear mongering from the media about inflation, rising interest rates, and an impending recession; however, there is one silver lining from this situation: U.S. fixed income is worth buying again. This means that you can finally get a reasonable, nominal return on U.S. Treasury Bills and Bonds. Here is the breakdown for how U.S. fixed income rates have changed over the past 2 years.

As you can see above, the interest rates for every security, except I-Bonds, have increased significantly since October, 2020. Buying a 1000 dollar 52-week T-Bill in October, 2020 that used to reward you with ~1 dollar now yields ~44 dollars if purchased in October, 2022. Losing 1000 dollars of liquidity for a year is definitely not worth earning a single dollar; however, earning 44 dollars is not too shabby.

Note: “Real” means adjusted for inflation, while “nominal” means not adjusted for inflation.

Why Buy Treasury Bonds and Bills?

Fixed income is not as sexy as buying a hot startup SPAC nor will it offer the asymmetric upside of buying a company run by Elon Musk. What U.S. fixed income provides you is an almost guaranteed opportunity to earn a modest, nominal return. In some situations, they can provide a positive, real return (i.e. adjusted for inflation). Meanwhile, stocks have the potential of dropping 90 percent in a year (**cough** Peloton) and real estate can hand you a disruptive tenant at any time. In summary, U.S. treasury bonds and bills currently provide:

• Modest, nominal returns of 3+ percent that are almost guaranteed
• Positive, real returns in some situations (e.g. TIPS potentially)
• Diversification to your portfolio
• A safer, less volatile return than stocks, ETFs, real estate, and corporate fixed income
• Returns that are indexed to inflation in some situations (e.g. I-Bonds, TIPS)
• Gains that are not taxed in some situations (e.g. T-Bills are exempt from state and local taxes)

In my particular situation, I am utilizing Treasury Bonds and Bills to achieve safe, positive nominal returns while saving for my first home. Because I plan on purchasing a home in <5 years, stocks are too risky of an asset to store these funds. Additionally, my savings account pays near zero interest so Treasury Bonds and Bills provide an easy method to increase my gains with minimal time commitment.

However, I should warn you about one drawback to buying these financial products because there is no such thing as free money. You will lose liquidity of your purchase amount for the duration of the bond/bill. For example, purchasing a 100 dollar 52-week T-Bill means 100 dollars will be withdrawn from your bank account and held with the U.S. Government for 52 weeks before the principal + interest is returned.

How Do I Buy Treasury Bonds and Bills?

The easiest way to purchase U.S. Treasury Bonds and Bills directly from the U.S. Government is through www.treasurydirect.gov. In the below set of screenshots, I walk you through purchasing a 52-week Treasury Bill (i.e. T-Bill) through my Treasury Direct account. The process is similar for other Treasury Bonds and Bills; however, you will need to set up your profile and bank accounts upon initial registration. I recommend saving your account number and password somewhere safe, such as a password manager.

The directions below accompany the images above. They walk you through the process of purchasing a 52-week T-Bill. The process for purchasing other financial products is similar.

1. Go to https://treasurydirect.gov/

2. Select “Log In”

3. (New users only) Select “Create a New Account” and follow the steps to create an account. Note the account number and password somewhere safe.

4. Select “Next” under “Log In” if your account number starts with a letter

5. Enter your account number and click “Submit

6. (Optional) If sent a one time passcode, open up your email, copy the code, and paste the code back into your browser. Then click “submit”.

7. Confirm this is the correct profile/webpage with the personalized image at the top.

8. If the image is confirmed, enter your password by clicking the virtual keyboard keys. Then click “submit”.

9. (Optional) Click “View a summary” under “Account Activity” to get a summary of your recent and future bond/bill purchasing activity.

10. (Optional) Select “ManageDirect” in the upper, blue horizontal bar to update your profile information, password, or bank account information.

11. Select “BuyDirect” in the upper, blue horizontal bar to start the ordering process to purchase a bond or bill.

12. On the ordering screen, select which financial product you desire. Treasury Bills have a duration of <= 1 year, TIPS have durations of 5+ years, and “Series I” (i.e. I-Series bonds) have 10,000 dollar contribution limitations in any given year. Other options are present as well; however, in the images above I choose a Treasury Bill.

13. Select the duration of the Treasury Bill, enter a purchase amount, select the bank account where the money will be withdrawn from, and the bank account where the principal + interest will be returned. In the example above, I choose a 52-week T-BIll and enter a purchase amount of 100 dollars. Note the duration and issue date of the financial product.

14. Once finished entering the desired type of financial product and purchase amount, click “Submit”.

15. Review the details of your purchase order and select “Submit” to finalize the order.

16. On the issue date of the financial product, an amount slightly less than your purchase amount will be withdrawn from your bank account. If the interest rate is 5 percent, then 95 dollars would be withdrawn for a 100 dollar 52-week T-Bill.

17. After the duration of your financial product has been realized and your bond/bill has matured, the principal + interest will be automatically returned to your bank account (100 dollars in this example, earning 5 dollars in interest). In the example above, it will take 52 weeks to receive this money. This assumes you selected “No” on the “Schedule Reinvestment” option.

    
    

Note: If some of the bond terminology is confusing, please view this page.

Conclusion

While there are alternative financial products (e.g. CDs, fixed income ETFs) that mirror the return and risk profile of U.S. Treasury Bonds and Bills, I prefer the latter because they avoid intermediaries and their associated costs. Each of these alternatives come with slightly different benefits and drawbacks. With Treasury Bonds and Bills you are earning interest directly from the source, the U.S. Government. The process on Treasury Direct is fairly simple and the deposit/withdrawal process of a financial product is somewhat automated; however, in some situations you will need to manually choose to redeem the bond (e.g. I-Series bonds after 1+ years). Don’t let your bank give you near-zero interest rates in a macro environment like this! Set up an account with Treasury Direct and start earning today.

Sources: Treasury Direct, FRED -- St Louis Fed, Bank of America screenshots