The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: devlin on October 12, 2014, 11:52:22 AM
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Hello,
I have recently opened an account at TreasuryDirect.com and I want to buy bonds. I want something that is short term and I can roll over.
I have lots of options and I just don't know enough about them. Maybe some here can point me in the right direction.
My options are:
Series EE Savings Bond
Series I Savings Bond
Zero-Percent C of I
4-Week Bill
12-Week Bill
26-Week Bill
52-Week Bill
2-Year Note
3-Year Note
5-Year Note
7-Year Note
10-Year Note
30-Year Bond
9-Year 8-Month TIPS
29-Year 4-Month TIPS
2-Year FRN
Please advise. Thank you in advance for your input.
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Cancel your account and buy a Vanguard bond fund. Your welcome.
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As VirginiaBob said, buying a bond fund from Vanguard is probably going to be a much better option for you.
To answer your question though:
The Zero Percent C of I is a certifcate of indebtedness, basically just a note that says the treasury owes you money. It earns no interest. It basically just represents money in your account at the treasury that you haven't used to buy bonds yet.
The bills are all zero-coupon bonds. That is, you buy them for slightly less than par (face value), and then when they mature the treasury pays you back face value. The interest you earn is in the form of the difference between what you bought it for and the face value of the bill.
The various duration notes and 30-year bond are all traditional bonds. You buy them for face value, and they periodically (I believe every six months) pay you a coupon, whose rate is determined by auction. Once they mature the treasury will then pay you back the face value, which is the same as what you bought it for. Your interest is received in the form of the coupon payments.
The TIPS are inflation-protected bonds. The coupon they pay is indexed to the CPI. I don't know the exact formula they use off the top of my head.
I also don't know what the FRN is off the top of my head.
The savings bonds are a totally different beast. Unlike all the rest of the things in the list, which are bought at auction, savings bonds are bought directly. I don't know what the exact terms are at the moment, but in general they're not spectacular. Note, when I say everything else is bought at auction, you won't actually be bidding on it. Large institutional players bid in the auction, and everyone who didn't bid gets their purchase price set based on the outcome of the auction.
Last I checked Treasury Direct doesn't provide any access to the secondary market. So if you, for example, bought a 7-year note through Treasury Direct, you're stuck holding it for 7 years. If you really wanted to get rid of it earlier you would have to transfer it to a brokerage account somewhere else to sell on the secondary market.
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Go with a bond fund. Better to invest in a fund that holds a wide variety of bonds with different yields and due dates than in any one type of bond. As the previous posters said, Vanguard is a fantastic option.
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Check out William Bernstein's Investing for Adults series. He talks about what bonds to purchase from Treasury Direct.
He's a strong advocate of buying bonds directly since there's no expense ratios and most total bonds are tilted toward US treasuries. The only bond funds he recommends purchasing via mutual funds are ones that are hard to replicate otherwise.
Not entirely sure if I buy everything he throws down, but it's a good read. Most of this is in his Rational Expectations book.
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If we're talking about US government bond funds, the "diversification" benefit of owning a variety of bonds from the same debtor, who, if it were to default, would put us into making up new rules as we go along territory, seems dubious. For the most conservative end of your asset allocation, it's worth learning what the bonds are and not paying an expense ratio.
For corporate bonds, by all means buy a low cost fund.
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What's your investment goal?
I only used TD for ibonds.
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Series I savings bonds are worth considering as an alternative to a cash emergency fund. The interest rate is much higher than any savings account (1.94% right now). Also, you don't have to pay any tax on the interest until you redeem the bond, allowing the growth to compound. The big caveat is that you can't redeem the bond for the first year after purchase.