When seeking to invest in government bonds, investors may generally be divided into two major categories: municipal bonds and Treasury bonds. Investors looking to increase the low-risk component of their portfolio or just save money at higher, low-risk rates have two alternatives.
If you are new to bond investing in general, government bonds might also be an excellent place to start. High yield savings accounts, certificates of deposit, money market accounts, and treasuries and municipals are often the best low-risk bond alternatives.
Introduction to Government Bonds
First, let us acquaint ourselves with some common terms to be aware of when looking at government bonds:
- Treasury bond: A security issued by the United States government.
- Municipal bond: A debt security issued by a local or state municipality.
- Maturity: The life of the bond.
- Yield: The yield offered as a return on the debt security’s investment. There are several different types of bond yield and methods for calculating them.
- Coupon: The amount of regular periodic interest payments.
- Bond rating: A rating that is provided by a rating agency based on creditworthiness qualities and characteristics.
Government bonds are essentially debt obligations of governments. Federal (sovereign) bonds are issued by the federal government with the federal government’s single credit rating backing them all. As of July 2020, the U.S. federal government holds the highest AAA rating from Fitch, an Aaa from Moody’s, with an AA+ rating from Standard and Poor’s.1
Both federal Treasury bonds and municipal bonds use the revenues from the bonds for financing government projects or activities. These government bonds also come with some special tax advantages that make them unique in the bond world overall.2 3 The type of government bond you are looking for determines where you can purchase it, so you need to decide which type of bond you would like to buy first.
Buying Government Bonds: Treasuries
Treasury bond yields will vary by maturity.4 As of December 2020, the U.S. Treasury bond market offered the following yields:
The U.S. Treasury has made buying Treasury bonds easy for U.S. investors by offering the bonds through their website, TreasuryDirect. Here’s a step-by-step guide to using TreasuryDirect. TreasuryDirect account holders can also participate in Treasury auctions, which are conducted approximately 300 or more times per year.5
The first step in the auction process is the announcement of upcoming auctions, which are generally declared four to five business days beforehand. This step discloses the number of bonds that the Treasury is selling, the date of the auction, maturity date, terms and conditions, eligible participants, and competitive and non-competitive bidding close times.6 Noncompetitive bids guarantee that investors will get the full purchase amount of the security at the yield determined during the auction by competitive bidding. Competitive bids specify the yield expected for security.
The final step of the auction process is the issuance of the securities. Securities are deposited to accounts, and payment is delivered to the Treasury.8
- What you will need: a computer, internet connection, the treasurydirect.gov link, your social security number, and personal information, $100 to start investing
- What to do: The Treasury makes TreasuryDirect pretty simple. All you need to do is:
- Go to the TreasuryDirect website
- Setup an account
- Start investing based on your maturity and yield preferences. The minimum for investment is $100. With $100 you can invest in Treasury bonds across the entire yield curve spectrum.