Radical Guide to Online Bond Investing: Treasury Direct

Treasuries will rightly make up 10-20% of your bond purchases.  In the companion guide, Guide to Bonds, we discuss the Treasury market in A Quick Introduction to the Treasury Market and U.S. Agencies and the increasingly significant Treasury Inflation-Protected Bonds (“TIPs”) market in A Quick Introduction to Treasury Inflation-Protected Bonds (TIPs).

Another way to buy and sell Treasuries and TIPs online is through a Treasury Direct account.   The Treasuries are held through the Federal Reserve and linked to your bank or credit union accounts.  (There’s also a small $25 account maintenance fee for balances over $100,000).

To setup the account, go to the Treasury Direct’s website (www.treasurydirect.gov).  Once there, click on the link to “Individual/Personal Investing” and just follow the instructions for setting up an account.   You will be required to provide information no different from what most brokers would ask for. 

Here are two suggestions.  First, don’t go the traditional paper-and-mail route for placing your buy orders (called “tenders”) for auctioned Treasuries.  With an online account, you can do all the buying, reinvestments and even some selling online.  Second, you should utilize the auction and buyback notice emails from the Treasury --- a very good way to keep track of upcoming auctions and news on your current holdings.

Bear in mind that you only hold auctioned Treasuries in your Treasury Direct account.  You can’t transfer in other Treasuries held elsewhere or other securities for that matter.  In short, a Treasury Direct account means you can:

  • Buy Treasuries at auction and manage reinvestments online.
  • Sell the previously bought Treasuries through the “sell direct” feature.  Through a somewhat cumbersome process, you notify the Public Debt Bureau to sell your Treasuries to the highest “bidder” for a flat $45.
  • See account statements and transactions online.

UNLIKE a broker account holding Treasuries, a Treasury Direct account means:

  • You will have auctions, not transactions.  You cannot buy or sell Treasuries in the open market --- i.e., ones that you did not buy at auction.  
  • You won’t have “heartbeat” trades with live markets.  In the multidealer marketplace, you will see two-way, live markets in Treasuries.  Here, on Treasury Direct, it will take time (“auction” time) to get done, in other words, on all your trades.
  • You have another account to manage. 
  • You cannot receive credit for Treasuries.  So the obvious benefits of sprucing up your account balance with Treasuries do not accrue to you.  Such benefits might include reducing trading and account maintenance fees.
  • You cannot receive “buy power” for the Treasuries.  The Treasuries sit in your bank account, not brokerage account, so no broker will grant you leverage against them.

But here’s the cost comparison.  Say you want only to trade and hold Treasuries bought in an auction.  The only clearcut cost advantage is in buying your Treasuries at auction.  In most brokerage accounts, you will pay, at most, $50 to participate in a Treasury auction.  In the Treasury Direct account, you pay nothing.

The costs favor the Treasury Direct account, but only for a small sliver of the bond universe --- Treasuries bought at auction.  It may be worth the cost just to consolidate your accounts and open up your trading horizon.

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June 7, 2005 | Permalink


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