A Beginner's Guide To Investing In Treasuries With Fidelity

Treasuries are debt obligations issued by the US government and are considered low-risk investments. They are also highly liquid and can be bought and sold easily. Treasuries are a good option for investors looking for a stable and reliable investment. Fidelity offers investors the opportunity to buy US Treasury bonds through its platform. This can be done by purchasing newly issued Treasuries at auctions held by the government or by buying previously issued bonds on the secondary market. Both types of orders can be placed through Fidelity.

How to buy Treasury bills on Fidelity

Logging into your Fidelity account

To buy Treasury bills on Fidelity, you will first need to log into your Fidelity account. Once you have done that, you can follow these steps:

Navigating to the "Fixed income, bonds, and CDs" section

Click on the “Products” tab and select “Fixed income, bonds, and CDs” from the dropdown menu. Then, click “Search for investments.”

Finding the "New Issues" tab

Click on the “New Issues” tab in the table. This will allow you to see the list of new-issue Treasury products. If you don’t see any Treasury bills in the list, check the U.S. Treasury auction schedule to see when the next auction is.

Previewing your order

In the quantity field, enter how many Treasury bills you want to purchase. Remember that each bond has a face value of $1,000 and that you buy T-bills at a discount. For example, a quantity of 1 means you will purchase a T-bill at a discount to the $1,000 face value.

Completing your purchase

Be sure to place an order before the auction date, as the new-issue bonds will stop being offered on this date. Fidelity will automatically credit your account with the principal amount when your T-Bills mature.

Benefits of Treasury Bill Yields

Treasury bills are extremely safe, liquid, and offer higher yields than what you would typically find in a savings or checking account. They are also low-risk investments backed by the U.S. government, making them a safe choice for investors.

The benefits of investing in US Treasuries

US Treasuries are an attractive investment opportunity for those seeking a stable and secure option. Here are some of the key benefits of investing in US Treasuries:

Safety and Low Risk

US Treasuries are considered one of the safest investments available due to their low credit and default risk. They are backed by the "full faith and credit" of the US government, which means the government guarantees the repayment of the bond's face value plus interest. This guarantee is supported by the government's ability to raise taxes and print currency. As a result, US Treasuries are often viewed as having virtually no "credit risk".

Predictable Income Stream

US Treasuries provide a dependable and predictable income stream. They generally do not have "call" provisions, which means the US Treasury cannot pay off the bond before its scheduled maturity. This predictability allows investors to know exactly how long their income stream will last.

Wide Range of Maturity Dates

US Treasuries offer a wide range of maturity dates, from short-term Treasury bills with maturities of up to one year to long-term Treasury bonds with maturities of 30 years. This allows investors to structure their portfolios according to specific time horizons.

Tax Advantages

Interest income from US Treasury bonds is generally exempt from state and local income taxes, although it is subject to federal income taxes. This tax advantage increases the after-tax benefits of these investments, making them particularly attractive to investors in high-tax states.

High Liquidity

The US Treasury market is highly liquid, meaning that Treasuries are easy to buy and sell. They are frequently traded in large volumes, resulting in lower trade transaction costs and more efficient price discovery for buyers and sellers. This liquidity also contributes to the overall efficiency and stability of the US Treasury market.

Low Minimum Investment

Treasury bills, a type of US Treasury, usually have a low minimum investment requirement, often starting at $100. This makes them accessible to a wide range of investors.

Diversification

US Treasuries can play an important role in diversifying an investment portfolio. They offer a low-risk option to balance out higher-risk investments. They are particularly attractive during economic slowdowns, as their value tends to increase when investors seek safer options.

Inflation Protection

US Treasuries also offer inflation-protected options, such as Treasury Inflation-Protected Securities (TIPS). These securities are designed to protect investors from the effects of inflation by adjusting the principal and returns based on changes in the consumer price index.

Ease of Purchase

US Treasuries can be easily purchased through online platforms, such as Fidelity, or directly from the US Treasury platform, TreasuryDirect. They can also be bought through financial professionals, commercial banks, or brokerage firms.

Auto-Roll Option

Some platforms, like Fidelity, offer an Auto Roll option for Treasury bills. This feature allows investors to automatically buy another Treasury bill with the same term and amount when the current one matures, providing a convenient way to maintain a continuous investment.

Stable Returns

While US Treasuries typically offer lower yields compared to riskier investments, they provide stable and steady returns. This makes them attractive to risk-averse investors who prioritize capital preservation and reliable income over higher yields.

US Treasuries, backed by the US government, offer a range of benefits that make them a compelling investment option for those seeking safety, predictability, and stable returns.

The different types of Treasuries

Treasury securities are divided into three primary categories according to the length of maturity: Treasury Bills, Treasury Bonds, and Treasury Notes.

Treasury Bills, or T-Bills, are short-term securities with five term options, from four weeks up to 52 weeks. They are sold at face value or at a discount from the face value, and when they mature, you are paid the face value. T-Bills do not pay interest. Instead, they are sold at a discount to their face value, and your return is the difference between the face value and the discounted price you initially paid.

Treasury Notes, or T-Notes, are government securities issued with maturities of two, three, five, seven, and ten years. Notes pay interest every six months. They pay less interest than T-Bonds since T-Notes have shorter maturities.

Treasury Bonds, or T-Bonds, are commonly referred to as "long bonds" because they have the longest maturity, at 20 or 30 years. They are issued at and mature at a $1000 par value and pay interest semi-annually.

Treasury Inflation-Protected Securities (TIPS) are Treasury securities issued by the U.S. government that are indexed to inflation to protect investors from inflation, which results in the diminishing value of their money. As inflation rises, so too does the principal portion of the bond.

Floating Rate Notes (FRNs) have interest payments that rise and fall based on the discount rates for 13-week Treasury bills. FRNs are issued for a term of two years, and interest is paid quarterly.

Other types of Treasury securities include Series I Savings Bonds and Series EE Savings Bonds.

How to add Treasuries to your portfolio

If you want to add treasuries to your portfolio, you have a few options. You can buy newly issued treasuries at government-held auctions or purchase existing treasuries on the secondary market. You can also get exposure to treasuries through mutual funds and ETFs that hold these securities.

Buying newly issued treasuries

To buy newly issued treasuries, you can participate in auctions held by the US Treasury. The price you pay and the yield you receive will depend on what others are paying at the auction and may differ slightly from your expectations. You can find the US Treasury auction schedule online. Keep in mind that non-competitive auction purchases are limited to $10 million per household for each security type and term.

Buying existing treasuries on the secondary market

If you don't want to wait for the next auction, you can buy existing treasuries on the secondary market. This market is one of the world's most actively traded, offering high liquidity and narrow spreads. You will receive a quote with the price you will pay and the yield you will receive.

Buying treasuries through mutual funds or ETFs

You can also invest in mutual funds or ETFs that hold treasuries as part of their portfolio. These funds typically use treasuries to provide ballast for their overall volatility and offset exposure to more volatile investments. Some examples of such funds include the Fidelity Government Money Market Fund (SPAXX) and the Fidelity Treasury Money Market Fund (FZFXX).

Important considerations

When deciding which type of treasuries to buy, one of the most important factors to consider is the length of time before maturity. Typically, treasuries with longer maturities offer higher yields but lock up your cash for a longer period. It's also important to be aware of the risks associated with treasuries, such as interest rate risk, inflation risk, and credit or default risk.

The risks of investing in Treasuries

While Treasurys are considered low-risk investments, there are still some risks to investing in them. Here are the risks of investing in Treasurys:

Opportunity Risk

The crucial word when discussing the risks of investing in Treasurys is "principal". In investing, the safest investments often have the lowest returns. Accepting a low return is a risky decision in itself because there is a risk that you could have earned better money elsewhere. This is known as opportunity risk, where an investor might have gotten a better return from another investment, but only time will tell.

Inflation Risk

Every economy experiences inflation to some degree. Treasurys have a low yield, or return on investment, and even a small amount of inflation can erase that return. For example, an investment of $1,000 in a Treasury for one year at 1% interest would yield $1,010. But with 2% inflation, the initial investment when returned will have a buying power of just under $990. Treasury Inflation-Protected Securities (TIPS) are a type of Treasury security designed to protect against inflation as their yields adjust based on changes to the Consumer Price Index.

Interest Rate Risk

When interest rates rise, the market value of debt securities tends to drop, making it difficult for investors to sell Treasurys without losing money. The degree of volatility increases with the amount of time until maturity. As rates rise, prices will typically decline.

Default Risk

All bonds carry the risk of default. While the US government has never defaulted on a debt or missed a payment, investors need to monitor current events, the ratio of national debt to gross domestic product, Treasury yields, credit ratings, and the weaknesses of the dollar for signs that default risk may be rising.

Frequently asked questions