Treasuries are fixed income investments issued by the U.S. government through the Department
of the Treasury to raise money for government expenses and to pay the nation’s bills.
They're considered one of the safest investments because they’re backed by the full faith
and credit of the U.S. government.
Many investors like Treasuries because they provide income and return the invested principal.
In this video we’re going to show you how to buy new issue Treasuries from U.S. government
auctions using tdameritrade.com.
Investors can buy Treasuries in the primary or secondary markets.
In the primary market, the U.S. government offers new issue bills, notes, and bonds at
weekly auctions.
These auctions are generally announced every Thursday and take place the following week.
An auction opens with the government offering a Treasury at a low yield, then raising it
until it finds willing bidders.
Auction participants are mostly large institutions like banks, insurance companies, foreign governments,
and so on.
There are two types of bids: competitive and noncompetitive.
When the Treasury Department is raising the auction yield, it’s taking the competitive
bids.
After the competitive bidding is over, the orders for noncompetitive bids are filled
at the average yield of the day.
TD Ameritrade is normally a noncompetitive bidder.
If investors don’t want to bother with the auction, they can purchase Treasuries from
other investors in the secondary market.
This is where previously issued fixed income products are bought and sold at varying prices
and yields, depending on supply and demand.
Many investors like to buy Treasuries at auction because they get a similar yield to everyone
else instead of having to pay whatever price the secondary market is offering.
Additionally, buying at auction doesn’t have some of the additional costs of the secondary
market, like potentially needing to pay a seller accrued interest.
With that said, when you buy a Treasury at auction, you’re limited to what is being
sold that day.
So, if you’re looking for a 10-year note and the Treasury is selling 8-week T-bills,
you may have to wait a few weeks before the notes you want are available.
However, you could probably find a 10-year note in the secondary market immediately.
So, how do you buy a Treasury at auction?
You can find Treasury auctions on tdameritrade.com in the Research & Ideas menu, under the Bonds
and CDs section, and select New Issues.
Next, select Treasury Auctions either here or here.
This is a list of upcoming and past Treasury auctions.
Notice the wide range of Treasury types.
Let’s break them down.
Treasury bills, or T-bills, have a maturity of one year or less.
They’re usually worth $1,000 at maturity and are sold at a discount at auction.
For example, an investor might purchase a one-year T-bill for $950 and, when it reaches
maturity a year later, the T-bill will be worth $1,000—a gain of $50.
So, at auction, the bigger the discount, the higher the rate of return.
Treasury notes mature in two to 10 years, while bonds have a maturity of longer.
Like other bonds, they’re issued with a face value of $1,000 and a coupon payment
that is made each year, in two payments six months apart.
At maturity, a bond is redeemed at par value, which is the same as the face value it was
issued at.
There are other securities issued by the Treasury as well.
TIPS, or Treasury Inflation-Protected Securities, are tied to the Consumer Price Index, or CPI,
which measures inflation.
TIPS work like other notes and bonds, but they also rise and fall with changes in the
CPI, making them more volatile than other Treasuries with similar maturities.
From time to time, you may also see an auction for a FRN, or floating-rate note.
FRNs usually mature in two years.
The return on a FRN is tied to the 13-week T-bill, plus a small spread.
If the yield on the 13-week rises, then the FRN will pay more; if it falls, the FRN will
pay less.
Now, let’s breakdown the rest of the information you’ll see here.
Under the Select column you can choose which auction to participate in by selecting a security
that is being auctioned.
Today you can select the 13- or 26-week Treasury bill or a 3-, 10-, or 30-year note.
The Issue column provides a brief description of the securities being auctioned.
The Auction Date tells you when you can expect your order to fill.
This column shows the Minimum Quantity you can buy.
If you decided to buy one Treasury at face value, you’d expect to pay $1,000.
This is the Maximum number of Treasuries you can buy, which is 10,000.
If you have a spare $10 million, you’re in luck, we can help you with that.
Announcement Date shows when the auction was announced, and Settlement is the date that
you’d assume legal ownership of the security.
So, let’s say you want to buy a 13-week Treasury bill.
I’ll select it.
Next, I’ll enter 1 in the Buy Quantity box.
Finally, I’ll click Review Order.
A quick note: Before buying a Treasury security, consider how it fits into your overall portfolio.
If you want a longer- or shorter-term bond than what is currently available, you’ll
need to wait for another auction or buy it in the secondary market.
You can buy from the secondary market using the Bond Wizard here.
Now, back to the example.
The review screen shows you some of the same information you saw previously.
One thing to note is the Coupon.
This is how much interest the issuer is paying, and it’ll be determined at the auction.
You can check the U.S. Department of the Treasury’s Daily Treasury Par Yield Curve Rates to get
an idea of the potential coupon rate.
Moving on: If we’re satisfied with our order, I’ll click Place Order.
In this example, we submitted an order to buy a 13-week Treasury note.
After settlement, we would expect to simply wait until it matures to get the interest
and the principal.
If we sold the bill in the secondary market before maturity, we may get more or less than
we paid for it.
Adding Treasuries to a portfolio is one way to diversify and attempt to take advantage
of higher interest rates.
Buying Treasuries through an auction can help investors avoid some of the additional costs
of the secondary market, which can make fixed income investing simpler.
Just remember to closely consider which investments best fit your strategy and timeline.