U.S. Treasury securities are in strong demand these days. Their yields are well above the inflation rate, they're free of state and local taxes, they're backed by Uncle Sam, and yields are competitive with similar investments. What many investors may not realize, however, is that it's possible to buy Treasuries directly from the federal government instead of through a bank or brokerage firm, or by investing indirectly in a mutual fund.
Treasury securities come in three forms: short-term bills that mature in three, six or 12 months; intermediate notes that mature in two, three, five or 10 years; and long-term bonds that carry 30-year maturities. Interest rates are determined by periodic auctions.The minimum investment for T-bills is $10,000, with additional amounts in multiples of $1,000. Two- and three-year notes are sold for $5,000 ($1,000 multiples), and five-and 10-year notes and 30-year bonds for $1,000 ($1,000 multiples). Interest on notes and bonds is paid every six months directly into your bank account.
Investors can buy Treasury securities directly from the government and thus save on brokerage fees by opening a Treasury Direct account. Contact the Federal Reserve Bank (to find the branch nearest you, call the Bureau of Public Debt at 202-874-4000) and ask for a one-page "tender." Check the box marked "noncompetitive" tender and send in your payment for the face value of the amount requested. A noncompetitive bid ensures that you'll receive the average interest rate accepted at that particular auction.
Here, according to the Institute of Certified Financial Planners, are the pros and cons of buying Treasuries directly.
1. The Treasury Direct program is free, except for a $25 annual fee on accounts of $100,000 or more. T-bills must be paid for with a cashier's or certified check, or cash if you walk in. Treasury notes and bonds can be paid for with personal checks. If you buy through a broker or bank, you'll pay $50 or $60 for each purchase, and even a no-load mutual fund investing in Treasuries will charge annual expenses and fees.
2. Investment minimums can be a problem. Not everyone has $10,000 to invest in a T-bill or $5,000 in a note. If you fall into this category, a mutual fund specializing in those securities might be your best bet.
3. Treasuries bought directly cannot be sold before maturity on the secondary market. To sell, you must transfer them to a broker or bank, which involves time-consuming paperwork and fees. If you think you might sell before maturity, buy through a broker. Keep in mind that shares in a mutual fund investing in Treasuries have no maturities, so there is always the risk that you could lose principal if interest rates go up.
4. Treasuries are backed by the full faith and credit of the U.S. government only for the security's registered owner. If you buy through a bank or broker, you might want to hold the securities in your own name.