Buying Treasuries – T-Bills & T-Notes

By: Dr. K C Gupta

TREASURIES compete well with CDs, yet many hesitate to buy them. There are T-Bills (maturities up to 1 yr), T-Notes (1+ to 10 yrs), T-Bonds (10+ to 30 yrs), Zero-coupon (Zeros), inflation-protected TIPS, floating-rate FRNs (2 yrs; weekly rate resets to 13-wk T-Bills).

T-Bills don’t have coupons but are sold at discount to par (100) & mature at par (like the Zeros). The 13- & 26- week T-Bills are auctioned weekly, the 52-week monthly, & other Treasuries quarterly or semiannually (but may have more frequent reopenings). With some planning, it’s possible to set up Treasury LADDERS.

Buying at AUCTIONS can be done via TREASURY DIRECT (TD) or brokerage accounts (& commission-free at major brokerages). The key dates are the ANNOUNCEMENT date after which the buy orders can be entered up to the early morning on the AUCTION date; (Dutch) auctions occur in late mornings on the Auction dates. The Auction RESULTS are announced midday or later on the Auction date; the SETTLEMENT/ Issue date is when transactions are settled & the securities issued.
Consult the Tentative AUCTION SCHEDULE for upcoming actions; you can buy original issue Treasuries only on the Auction dates. Beware that money from your account will be gone on the morning of the Auction Date or soon after. One exception to this may be when you also have Treasuries of the same or greater amount(s) maturing in the auction week, & then your brokerage may settle all Treasury events on the Settlement/ Issue date.

If you hold Treasuries in your TD account, you have to transfer them out to your brokerage account to sell them before maturity. So, many prefer to buy Treasuries at brokerages for maximum flexibility. The TD accounts are just for buying Treasuries at auctions & holding them to maturity. Some like to consolidate holdings of Treasuries & Savings Bonds (I-Bonds, EE-Bonds) at TD. Despite their name, the Savings Bonds aren’t securities & those can be bought only at TD.

Most Auctions issue new Treasuries (original issues). But there are several Auctions with reopened older issues – these have the same CUSIP#, maturity dates & interest rates as the original, but new auctions are held for them. The Auction Announcement will indicate whether it’s a reopened auction, but the general Treasury Auction Schedule doesn’t do so.
There may be surprise/ unscheduled reopenings of much older issues if the rate environment justifies it, e.g. an older 5-Yr T-Note may be reopened as 2-Yr T-Note, or the 2 CUSIP# may be merged after the auction. For retail buyers, it doesn’t matter much whether an auction is for a new issue or reopened issue.

Buying/ Selling Treasuries in a very liquid SECONDARY market can be done at any time at brokerages (but not at TD). Treasuries trade at tiny bid-ask spreads & major brokerages don’t charge commissions for trading Treasuries as they do for other bonds. There may be gains or losses. Liquid Treasuries are definitely better than illiquid CDs with comparable interest rates.

Treasury AUTO-ROLLS are possible at major brokerages but must be set up at the time of purchase for the new Auctions. A maturing Treasury is rolled into a new Treasury of similar maturity. T-Bill auto-rolls are very convenient for set-&-forget holdings of T-Bills. Be sure to understand the auto-roll process at your brokerage – it’s well coordinated at Fidelity (no gaps), has gaps at Schwab, & not yet available at Vanguard. Auto-rolls can be cancelled a few days ahead of maturity until the applicable auction date, or by calling the brokerage anytime.

TAXES for T-Bills are due only on maturity, so there may be minor deferrals of taxes. For other Treasuries, you will get 1099-INT, 1099-OID (for TIPS). For Treasuries held at brokerages, your year end brokerage 1099 will include the related information. For Treasuries held at TD, you have to login to get the 1099s – TD doesn’t mail year end 1099s like banks & brokerages. Treasury securities are exempt from state & local taxes, so don’t forget to make appropriate adjustments to your State 1040.

Common quotes for Treasuries show YTM (yield-to-maturity) yields, except for T-Bills that show discounts (from par) & coupon equivalent yields.

There aren’t losses on Treasuries held to maturity. But when you buy bond funds (Treasury or general), they have strong duration effects & may have losses when you sell. Short/ intermediate-term bond funds are often recommended for near-term goals with duration matching, but holding Treasuries directly may be better.

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