July 18, 2024

Financial Samurai
Slicing Through Money's Mysteries
Published: by 10 Comments
With U.S. treasury bond yields zooming higher, the interest in buying treasury bonds has followed suit. Let me show you how to buy treasury bonds online.
Treasury bonds are risk-free investments if you hold them until maturity. Treasury bonds are issued by the United States federal government to finance projects or day-to-day operations. As inflation and inflation expectations rise and fall, so do treasury bond yields.
The first way to buy treasury bonds is through TreasuryDirect. TreasuryDirect.gov enables you to buy treasury bonds straight from the government each time treasury bonds are issued. Hopefully, all of you already have a TreasuryDirect.gov account because all of you decided to buy I Bonds in 2021 and 2022.
The $10,000 worth of I Bonds we bought at the end of 2021 and another $10,000 we bought at the beginning of 2022 have been fantastic investments. Too bad individuals are limited to buying $10,000 a year. As a result, more people are looking to buy treasury bonds, where purchase amounts are unlimited.
Unfortunately, the TreasuryDirect.gov website is cumbersome. Don’t lose your password or the answers to your security questions. It will take one hour to get a hold of someone to reset your password. Further, you can only buy treasury bills (one year or less) or treasury bonds whenever the government decides to auction them. And when the bills or bonds are available, you can’t easily see their yields!
Below is a snapshot of what I see when I log on and click BuyDirect and select Bonds. Notice how it is unclear what the yield is for each Product Term, despite the website asking you to input a Purchase Amount.
The second way to buy treasury bonds is through an online brokerage account like Fidelity, Charles Schwab, or E*Trade. You pay a nominal fee by receiving a lower bond yield (3-5 basis points). But it may be much easier with a lot more variety for most investors.
Given I use the Fidelity platform, I’ll show you how to buy treasury bonds using this platform. However, all the online brokerage accounts are similar. Online brokerage accounts are marketplaces for buying and selling already issued treasury bonds.
Step 1: Once you’ve opened up an investment account on Fidelity, go to News & Research. Then click Fixed Income, Bonds & CDs in the dropdown menu.
Step 2: You will see a chart that shows all types of bonds based on duration. I’ve highlighted the U.S. Treasury row in a red box. In the image, the U.S. treasury yields range from 3.53% for a 3-month treasury bill to 3.8% on a 30-year treasury bond.
Once you’ve selected the type of bond and duration you would like to buy, click the yield link. Please note these rates change multiple times a day.
Step 3: You’ll now see various bonds on the Fidelity secondary market to choose from. Below is a list based on me clicking 4.23% for a 1-year treasury bond.
You mainly want to choose to buy the bond with the highest Yield. The Maturity Date will all be similar, but they can range by up to two months. Remember, you won’t be getting back the par value ($100/share) until that Maturity Date.
Why are there so many types to choose from? Again, online brokerage accounts are a marketplace for existing treasury bonds in this example. Further, not all the treasury bonds under a specific maturity date were issued at the same time. This is why you see different Coupon payments and bond prices.
When you click on one of the many bond offerings, a term sheet like the one below will appear. Although this bond term appears under the 9-month Treasury bond duration, it was actually issued on 7/02/2018 with a coupon of 2.625%. In other words, the bond qualifies since it only has about nine months left until maturity.
The buyer today of this 5-year treasury bond that expires on 06/30/2023 gets a 2.625% semi-annual coupon payment. Because interest rates have risen, the buyer can buy the bond below par value (below $100) compared to when the bond was first issued by the Treasury on 07/02/2018. The bond needs to value to make its yield to maturity more enticing.
If the buyer at ~$97.20 holds onto the bond until it is redeemed on 06/30/2023, they will receive $100 for each bond they own, receiving an effective yield of ~4.13%. The online brokerage calculates this all for you.

Step 4: The final step to buying treasury bonds is to select an Account to buy them in, then select the Quantity. One bond equals $1,000 face value. Once you click Preview Order, you can review what you’re about to buy. Then click confirm if everything looks right.
Step 5: Once you’ve purchased your U.S. treasury bonds, you’ll see a confirmation notice that looks like this. Since you’re buying on the secondary market, you’ll see a Third Party Price that earns a slight spread to make a profit. You can then check your position by clicking the Positions link in your account.
U.S. treasury bonds are risk-free investments that offer different yields at various maturities. Given everybody should have a certain percentage of their net worth in cash or cash equivalents, U.S. treasury bonds are one safe investment option.
Other safe options for investing cash include an online savings account, a Certificate of Deposit (CD), and AAA-rated municipal bonds. Just know municipalities can sometimes default on their payments if the economy gets bad enough like it did during the 2008 global financial crisis. At least if you buy your state’s municipal bond, you won’t have to pay federal or state income taxes on the coupon payments.
If you want to take more risk, you can purchase longer-duration CDs, treasury bonds, or municipal bonds. The risk here lies in liquidity risk and real interest rate risk, not principal risk if you hold to maturity.
For example, if you purchase a 20-year municipal bond but need the money before 20 years, you will likely have to sell at a discount. If you lock in a 10-year treasury bond at 3.92% but inflation continues to increase, then you’ve locked in a suboptimal yield. You could have purchased a 10-year treasury bond with a higher yield.
Finally, if you want to take even more risk, you can purchase corporate bonds all the way down to Baa/BBB ratings. Corporate bonds are higher risk because corporates have higher default and bankruptcy rates than municipalities and the federal government.
Here are the main reasons why you might want to buy U.S. treasury bonds.
You may want to buy U.S. treasury bonds because they offer an attractive risk-free yield. You find comfort in knowing you will get 100% of your principal back if you hold to maturity plus coupon payments.
If U.S. treasury bond yields are higher than yields for savings accounts and CDs, then buying a treasury bond with the same duration makes sense. U.S. treasury bond income is not taxed at the state level. Therefore, if you live in a high income tax state such as California, New Jersey, Connecticut, and Hawaii, U.S. treasury bonds offer relatively higher returns.
You may also want to buy treasury bonds because yields are attractive and you believe inflation has peaked. If you believe inflation has peaked, you also believe bond yields have peaked.
For example, you could buy a 5-year treasury bond yielding 4.18%. If you believe inflation will decline to 2% in one year, you will earn a 2.18% real yield for four more years if you hold to maturity.
In addition, you could sell the 5-year treasury bond for a profit since it will increase in value. How much the principal value of the treasury bond increases will depend on inflation expectations. However, the treasury bond could also increase in value to the point where the yield is at parity to the 2% inflation rate at the time.
Who doesn’t love getting something for free? Even ultra-rich people have a difficult time passing on a free lunch!
The majority of mortgage holders have a mortgage rate below the yield of a one-year treasury bond or longer duration (4%+). Therefore, mortgage holders can simply buy U.S. treasury bonds to live for free for the next 30 years!
For example, you could buy a 30-year treasury bond with a ~3.8 percent yield today. For the past two years, most mortgage borrowers were able to refinance to a 30-year fixed-rate of three percent or less. Therefore, not only could you live for free for the next 30 years, but you could also live for free and earn risk-free income.
The only catch is that to truly live for free, you need to buy an equal amount of treasury bonds to your mortgage amount. But even if you can’t, every dollar you do spend buying higher-yielding treasury bonds is an arbitrage that lowers your true living costs.
Given the rise in U.S. treasury bond yields, it is currently a suboptimal financial move to pay down mortgage principal. Instead, it’s optimal to buy treasury bonds with much higher yields.
Before you buy a treasury bond, you should have a buying strategy based on your liquidity needs, financial goals, existing net worth asset allocation, and your inflation forecasts.
The easiest treasury bond buying strategy is to buy the shortest duration treasury bond available. This way, you have minimal liquidity risk and can always buy more short-term treasury bills at their latest rates. You don’t have to think too much about anything else. The downside is lower yields.
In other words, you can buy 3-month treasury bills yielding 3.53% at regular intervals. Let’s say you buy 3-month treasury bills every month. After three months, you’ll always get principal back every month. You can then use your returned principal to buy another 3-month treasury bill and so forth.
In a rising interest rate environment, buying shorter-duration treasury bills is the optimal strategy. In a declining interest rate environment, buying longer-duration treasury bonds is the optimal strategy.
When interest rates are declining or potentially going to decline, you want to lock in a higher yield as inflation and yields fall. If you do, the value of your treasury bonds will increase in value.
The trick is properly forecasting when inflation will roll over, how quickly, and for how long. Further, you need to pay attention to your liquidity needs. If you plan to buy a house in three years, locking up your downpayment in a 10-year treasury bond may not the best move.
If inflation stays elevated or increases for three years, you will receive a deeper discount to par value if you were to sell your 10-year treasury bond. Only if inflation collapses when you want to sell would you receive a premium to par value.
If you are unsure about the future macroeconomic environment, as many of us are, you can hedge by buying a variety of treasury bond durations.
Let’s say you have $250,000 in cash with enough cash flow to cover your monthly living expenses by three times. With a 70% conviction level, you believe inflation has peaked. In one year’s time, you believe headline inflation will drop from 8% today to 3.5%. You also want to upgrade your home in three years.
You buy:
So far, I’ve discussed strategies for buying individual treasury bonds and holding them to maturity. This way, you are guaranteed to get all your principal back and earn coupon payments in the meantime.
However, you can also buy bond ETFs for more liquidity and investing flexibility. You can sell a bond fund and receive settled cash within three days. If you are a trader, you can invest in bond funds to potentially profit from a potential move down in yields and vice versa.
Just know that if you buy bond funds or ETFs, you face principal risk. Below is an example of IEF, the iShares 7 – 10 Year Treasury Bond ETF, currently at a 12-year low. If you’re OK with holding IEF forever and earning income, that’s fine too.
2022 will go down as one of the worst years ever for the bond market. As a result, buying treasury bonds now looks very enticing.
When you could only get a 0.65% yield on a 10-year treasury bond in 2020, why bother? Most didn’t. However, some people did bother because they feared the world was coming to an end. Of course, we know now the world did not end with COVID and the S&P 500 and real estate zoomed higher.
Today, buying a treasury bond up to a 3-year duration looks attractive. Chances are high inflation will come down within three years. If it does, earning a 4%+ yield will look incrementally more attractive over time.
Buying a 5-year treasury bond with a lower 4.18% yield (vs. 4.38% for a 3-year) is a little more difficult. It’s hard to forecast three years into the future, let alone five years. At the same time, locking in a 4%+ rate for longer is also enticing since 2007 was the last time the 10-year bond yield was above 4%. There’s a chance in five years will look back on today and can’t believe we could’ve locked in 4.13% risk-free money for 20 years.
Given the uncertainty of where interest rates and inflation will go, staggering your treasury bond purchases among different durations is an optimal move.
Finally, if you believe in lower returns over the next 10 years as Vanguard and many other investment firms do, then aggressively investing the majority of your money in 10-year treasury bonds yielding almost 4% makes sense.
After all, Vanguard’s model believes U.S. stocks will only return 4.02% and U.S bonds will only earn 1.31%. Why bother investing in more volatile stocks when you can get the same return from treasury bonds with no risk? This dilemma is one of reasons why U.S. stocks may have a difficult time rebounding until treasury yields go down.
The thing is, nobody knows the future. But what I do know is that getting a 4%+ risk-free return without having to pay state taxes is attractive. I love the concept of living for free. If the Fed insists on destroying the economy, I might as well take advantage and earn a higher return on my cash.
Readers, are you buying U.S. treasury bonds today? Why or why not? Where do you expected U.S. treasury bond yields to be in 12, 24, and 36 months?
To gain an unfair competitive advantage in building wealth, read Buy This, Not That. It was written exactly for volatile times like these.
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Filed Under: Investments
Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.
I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.
In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.
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Jackie says

Hi Sam, thank you for this write up. I acquired the Series I Bond in 2021. Now I want to understand what else I can purchase with $20k. Should I purchase a few 3-mth notes? I’m a newbie but want to try. I truly enjoy your messages. Thank you and enjoy your family time. Sincerely, Jackie of MD
Mehul says

Why not do the same ladder strategy with CD’s? For example 1-3 month CDs are offering 3.35%, 4-6 month is 3.8%, 7-9 months is 3.95%?
Financial Samurai says

Can definitely do the same. You just have to compare the rate for similar terms and the AFTER-TAX net yield since you will have to pay state income taxes on CD income.
Bob Herczeg says

Great article! Your detail and how-to was very helpful, along with the rationale for doing so. I’ll be doing exactly what you outlined!
Thank you!
N says

Super interesting, thank you Sam.
From a tax perspective, is there a difference in buying a bond at $100 (face value) with a ~4% yield, versus buying an older bond at say, $95, that has a lower yield, but still has the same 4% effective yield because you’ll get redeemed at $100 when the bond matures?
Like, is one capital gains vs income, and with the right approach can you get LTCG (better taxation) versus ordinary dividend income (worst taxation?).
Whit Whitacre says

What a timely article Sam. I started laddering into 1 year T-Bills in August. 3% then, 4% today and I think we will see 4.5% soon. As interest rates peak, some think that will be in the first quarter of 2023, I plan on locking in longer term bonds. Also it is good to know these returns are not taxed at State level.
Glad you mentioned that TreasuryDirect.gov is cumbersome and has no customer service. I bought I Bonds last year but was unable to log into my account after. Calling the customer service line 4 different times put me on hold waiting to speak to someone for over an hour. Never got through. Very frustrating. By all means use your brokerage account to buy bills or bonds. I use Interactive Brokers.
Keep the good advise coming!
Thanks Whit
Bradley P says

How much cash do you keep on hand to make these investments (into Treasury Bonds)? I might have read somewhere that you recommend 6 months of living expenses… is this investment coming for you out of those cash living expenses (assuming not, since you need it to be liquid) or some other investment-worthy cash source you keep beyond that?
Financial Samurai says

Six months of living expenses or more is recommended. However, if you’re buying 3-month treasury bills, after 3-months, you’re always getting your principal back. So you could conceivable just have just two month of living expenses if you’re just investing in 3-month t-bills.
Jam says

What about an ETF like STIP?
Mauer says

Man, is that really yielding 6%?
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