Treasury Bond Buying Tutorial

Discussion of the Bond portion of the Permanent Portfolio

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Gumby
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Treasury Bond Buying Tutorial

Post by Gumby » Wed Oct 26, 2011 2:13 pm

For those interested in owning your own Treasury bonds directly*, I've put together a series of 5 screenshots to show you how easy it is to buy Treasury Bonds at Fidelity. I use Fidelity because they don't charge any fees when you buy or sell Treasuries online. Vanguard is also now free. I believe Schwab is also free. Feel free to enter comments or questions below.

STEP 1

Click the "Investment Products" tab and go to the "Fixed Income & Bonds" section of Fidelity.com.

[align=center]Image[/align]

This page has lots of information about bonds, so feel free to click around this page a bit before you click on the "Find Bonds" button.

STEP 2

In this tutorial, I'm going to buy the longest Treasury bond I can find on the Secondary Market. The Secondary Market is simply the open market where Treasury Bonds are bought and sold. You're not going to receive any paper or stained certificates in the mail or anything like that. It's all done electronically now, just like stocks are handled. You could certainly buy your bonds via the scheduled Treasury Auction, and the process is almost identical to what we'll be covering here (you would just do a "non-competitive" bid). Again, once you purchase the bonds, it makes no difference if they were purchased by you at auction, or sold to you on the Secondary Market — the bonds are the same either way. However, you can only sell your bonds on the Secondary Market (since you won't be holding your own Treasury Auctions).

Some brokerage houses will offer free Treasury purchases via the Treasury Auctions and make you pay a fee for Secondary Market transactions. I recommend checking what the fees are for both auction and secondary transactions before you purchase so that you don't find yourself paying a $40 fee to sell the bonds you got for free at the auction. Again, Fidelity, Vanguard and Schwab do not charge a fee when you buy and sell Treasuries online. And Vanguard appears to now offer free Treasury transactions over the phone as well.

[align=center]Image[/align]

So, you just click on "Secondary" and proceed to the next page.

STEP 3

This is a Search page to find the kinds of Treasuries you want. (You can click on each field name for a glossary explanation.)

[align=center]Image[/align]

The options on this page look confusing, but they are only there to help you narrow down they type of Treasury you want to purchase. If you don't get specific with the search fields, you're probably just going to get a very long list of bonds, which is fine. For this tutorial, we are purchasing the longest Treasury Bonds we can find. I selected "Bonds" for the "Type" of Treasury, and this will just filter out the Bills, Notes and TIPS from the resulting list. For "Call Protection" I put "Yes," though in reality, every Treasury Bond has call protection. For "Zero Coupon" I selected "No" because we want bonds with a coupon for the Permanent Portfolio. You can select "Graph" or "Table" for your resulting display. I usually choose "Table" because I just want to read the basic details. You can leave the other fields blank to see every available Treasury bond. Now, let's click "Show Offerings" and we'll see what appears...

STEP 4

Here is the list of the available bonds on the Secondary Market...

[align=center]Image[/align]

I've cut out the middle of the list so that you can see the longest Treasury bond is at the bottom of this list. Your list may look different depending on what options you chose. Or your list might be multiple pages long if you didn't narrow your options down on the search page. You can always edit the search in the upper-right hand corner, above the list. On this particular list, the longest bond is at the end of the list. You can see that the maturity date is 2041 — 30 years from now. That's what we want for the Permanent Portfolio.

You may be tempted to buy the bond with the larger coupon. However, keep in mind that the higher coupon will sell at a premium. The truth is that it doesn't really make a difference. The Secondary Market is so liquid and efficient that the bonds are priced in a way that you aren't going to make more money by buying the higher coupon — you'll just pay more to get more more.

For the Permanent Portfolio, we don't care what the coupon is. We just want the longest Treasury bond we can find, because longer Treasuries are more powerful. We've found the longest Treasury available here at the bottom of our list, so let's buy it. Click on the "Trade" button next to that Treasury bond.

If you have multiple accounts, Fidlity will ask you which account you want to purchase the bonds in. Select the proper account and proceed.

STEP 5

This is the order page. If you're familiar with Fidelity, you'll see that this is very similar to the screen you see when you're about to buy a stock.

[align=center]Image[/align]

Make sure you've selected the right account. For the "Action" field, select "Buy." Next you'll see the CUSIP# for the bond you selected. Every type of stock or bond has a unique CUSIP#. So, everyone who bought the same bond as you will have that exact CUSIP# associated with their bond. This number is helpful for quickly looking up bond details. The description explains the bond associated with that CUSIP#, and that's what we'll be purchasing here.

Next, we'll select the quantity of bonds we want to purchase. As you can see from the text below the quantity field, each bond has a face value of $1,000. Depending on the market price of the bond, you may pay more or less than this face value.

Long Term Treasuries are in very high demand right now, so as I'm writing this (as of 2:38pm on Wednesday, October 26, 2011), just 1 of these 30 year bonds is currently worth about $1,110.  In this example, I have $5,860 in this account, so I should be able to purchase 5 of these bonds. So, I put "5" into the quantity and now I just need to select the Order Type.

Many people suggest only using Limit Orders for any purchase, so that you can choose the maximum price you're willing to pay. If you use a limit order, you'll want to look at the Ask/Bid prices being shown in the Real-Time Quotes section of the page (in the lower-right-hand corner). For this tutorial, I'm just going to use a Market Order (understanding that some High Frequency Trader may make a few pennies off of me in the process). If nothing else, a Market Order will make sure the transaction happens quickly.

Next, I will choose "Preview Order" to check my transaction one more time. Once everything looks good, be sure you click "Confirm" on the next screen to place your order.

One word of warning. Once your order is placed, you may see that the quantity of your order has shifted from the bond quantity to the face value number (i.e. my quanity would change from 5 to 5,000 once the order has been placed). Don't worry, this is normal. You can also call up Fidelity to confirm that everything is ok. (I believe this is due to the fact that the Treasury actually sells these bonds in $100 increments, even though Fidelity only lets you purchase them in $1,000 increments).

Once the order has been placed, it will appear in your portfolio listing after the Settlement Date (usually three business days later). And after the end of each day, Fidelity will update the market price of your bonds in your portfolio so you'll always know what they're worth.

That's all there is to it. Please leave comments and questions below and I'm sure someone here will happy to help.

* NOTE: When you purchase bonds through a brokerage, such as Fidelity, the bonds are typically held in the brokerage's "street name" registration.

http://www.sec.gov/investor/pubs/holdsec.htm

In other words, the bonds are registered in the brokerage's name, and they act as a custodian for your bonds. You are the "beneficial owner" only in their internal records. Your brokerage house may "borrow" your bonds for their own lending purposes, and there is always a small amount of counterparty risk with this arrangement. This is how the brokerage is able to offer "free" Treasury trades. You're basically buying assets for the brokerage's own use. You absolutely have a legal right to those bonds. But, you just need to understand that all brokers have small amounts of counterparty risk.

Harry Browne believed that during times of severe market stress is when counterparty risk was at its highest — when you needed your investments the most. If your brokerage were to declare bankruptcy — and followed the rule of law (and they didn't illegally steal your assets) — your ownership of your bonds would need to be verified by the bankruptcy trustee before they were released for transfer to another custodian.

As far as I know, TreasuryDirect appears to be the best way to have direct ownership of Treasuries. TreasuryDirect is excellent for holding bonds to maturity. However if you need to sell your bonds in TreasuryDircet before they reach maturity, you need to fill out a form to transfer them to a broker (such as Fidelity) for selling on the Secondary Market.
Last edited by Gumby on Tue Jan 31, 2012 10:12 am, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
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Re: Treasury Bond Buying Tutorial

Post by bigamish » Wed Oct 26, 2011 2:16 pm

This. Is. Awesome.
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Re: Treasury Bond Buying Tutorial

Post by moda0306 » Wed Oct 26, 2011 2:21 pm

Ditto, and I don't even have Fidelity.

Way to grease the wheels to direct ownership, Gumby.  I can tell you that the lack of something like this is what has kept me from doing direct bond ownership.
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Re: Treasury Bond Buying Tutorial

Post by bigamish » Wed Oct 26, 2011 2:26 pm

moda0306 wrote: I can tell you that the lack of something like this is what has kept me from doing direct bond ownership.
Same with me.  I will now be owning them with my next rebalance.
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Wed Oct 26, 2011 2:34 pm

We all have to learn at some point. I didn't know how to do this either when I first started my Permanent Portfolio. I called up Fidelity's Bond Desk last year and they walked me through the whole thing from start to finish. So, I definitely recommend calling up your online broker if you have specific questions. They are there to help you.

The best part of direct ownership is no fees or expenses — that's huge.

The main point of this tutorial is really just to demonstrate how easy the process is.

(And thank you to Moda and Stone, for highlighting the potential risks of TLT, and other bond funds).
Last edited by Gumby on Wed Oct 26, 2011 3:38 pm, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by 6 Iron » Wed Oct 26, 2011 3:37 pm

Gumby, thanks for the motivation. I called Vanguard about this, and was informed that if you sell TLT, it takes three days to clear, while purchasing bonds on the secondary market clear on a single day, so one would need to sell TLT at least 2-3 working days prior to placing a bond order. The bond desk at Vanguard informed me that purchases are performed at market price, but if the price of the bond has gone up after you started the order process, it is canceled, and allows you to reenter. They may have a mechanism for limit orders, but I did not pursue this in detail with the representative.
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Wed Oct 26, 2011 3:42 pm

6 Iron, Just be aware of Vanguard's fee structure for Treasury bonds. It was enough to make me move my Treasury bond holdings to Fidelity.

https://personal.vanguard.com/us/whatwe ... ommissions

It looks like "Flagship" members are commission-free. But, everyone else, including "Voyager" members, pays a minimum $40 fee on Secondary Market transactions!! (and $10 for auctions). I think that's unfair.
Last edited by Gumby on Wed Oct 26, 2011 5:48 pm, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by moda0306 » Wed Oct 26, 2011 3:44 pm

I think TLT's drop today was from all of us rushing out.  Kidding of course

One of the most productive topics in the last year of PP chatter fellas (and ladies?).

Great info-diving.
Last edited by moda0306 on Wed Oct 26, 2011 3:51 pm, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by MediumTex » Wed Oct 26, 2011 4:11 pm

Nice work Gumby.

Thanks for posting.
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Re: Treasury Bond Buying Tutorial

Post by quenali » Thu Oct 27, 2011 10:00 am

Well done Gumby.
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Re: Treasury Bond Buying Tutorial

Post by christina » Thu Oct 27, 2011 12:45 pm

Yup. I'm doing the same thing with my online broker up in Canada.
Thanks for posting.
It *is* easy.
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Re: Treasury Bond Buying Tutorial

Post by moda0306 » Thu Oct 27, 2011 12:55 pm

If TLT goes to $hit, I say we make good on our plan to meet up and have a PP BBQ at MT's place.

It will be cause for celebration.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

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Re: Treasury Bond Buying Tutorial

Post by mandynshane » Thu Oct 27, 2011 6:04 pm

anyone know anything about treasury direct?
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Re: Treasury Bond Buying Tutorial

Post by craigr » Fri Oct 28, 2011 2:44 pm

Thank you Gumby.

Vanguard's bond desk is almost as easy to use as well (but Fidelity's interface looks amazingly simple and others should learn from it). Buying bonds is not hard and is what I do myself and recommend if you are able. They just sit there and pay interest once this is all done.

Thanks again Gumby!
Last edited by craigr on Fri Oct 28, 2011 2:48 pm, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by Lone Wolf » Fri Oct 28, 2011 3:02 pm

Well done!

I use this myself and can verify that it's just as easy as it looks.  In fact, I use these screens to purchase individual T-bills and T-notes to construct a ladder for the "cash" portion of the portfolio.  That covers both "cash" and "bonds".

If you find yourself a nice, safe place for physical bullion (like a cheap safe deposit box), you're looking at direct ownership and a 0% expense ratio for the great majority of your portfolio.  There's a lot to like about that.
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Re: Treasury Bond Buying Tutorial

Post by MediumTex » Fri Oct 28, 2011 3:16 pm

Lone Wolf wrote: If you find yourself a nice, safe place for physical bullion (like a cheap safe deposit box), you're looking at direct ownership and a 0% expense ratio for the great majority of your portfolio.  There's a lot to like about that.
0% expense for 50% of the PP in the form of LT and ST treasuries.

0% expense for 25% of the PP in the form of safe deposit box at neighborhood bank that provides the box free to longtime customers.

Tiny expense ratio for stock market index fund.

It's one more thing to like about the PP.
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Re: Treasury Bond Buying Tutorial

Post by moda0306 » Fri Oct 28, 2011 3:18 pm

I think we should mention the implied "load" of gold buying (I'll leave treasury-buying out since Fidelity allows it for free).

Also storage or insurance on physical gold should also be added as another small asterisk.

Just playing devil's advocate.  I fully agree with MT that the cheapness is stunning.
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Re: Treasury Bond Buying Tutorial

Post by Lone Wolf » Fri Oct 28, 2011 9:12 pm

moda0306 wrote: I think we should mention the implied "load" of gold buying (I'll leave treasury-buying out since Fidelity allows it for free).
True!  Still, this is only a one-time charge and (if you shop around) not a terribly big one.  For example, Tulving's offering Maple Leaf coins for $35 over spot and buying them back for $17 over spot.  That's an $18 spread per coin, so just a hair over 1%.  Not much in the scheme of things if you hold your gold for a long time.

Also, if you're macho enough (and rich enough!), get yourself a 1 kilo gold bar for straight-up spot.  :)
moda0306 wrote: Also storage or insurance on physical gold should also be added as another small asterisk.
Insurance may not be a bad way to spend some of your PP riches but it's not a requirement.  Storage in a safe deposit box at your local bank is cheap, often around $30-$50 per year.  If you hold even 20 ounces of gold in a $30 safe deposit box, that works out to less than 0.08% per year.
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Fri Oct 28, 2011 10:32 pm

craigr wrote: Thank you Gumby.

Vanguard's bond desk is almost as easy to use as well (but Fidelity's interface looks amazingly simple and others should learn from it). Buying bonds is not hard and is what I do myself and recommend if you are able. They just sit there and pay interest once this is all done.

Thanks again Gumby!
Not a problem. And thank you for shedding light on some of the questionable practices of Treasury bond funds.

Craigr, I noticed that you posted a link to this tutorial. That's great. However, if you, or anyone else, wants to copy/share this tutorial to your own site, you should feel free to do so. Copy the text and photos, and/or edit the text. Do whatever you like. That's why I made it. Knowledge is power and this kind of knowledge should really be shared and copied with as many people as possible so that people can take their finances into their own hands.
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Re: Treasury Bond Buying Tutorial

Post by rickb » Sat Oct 29, 2011 4:20 pm

It's worth noting that the very same process can be used to buy short term treasuries at auction to set up a ladder with whatever duration you want with as many rungs as you want instead of relying on a treasury MM or ETF such as SHY for your cash as well.  Fidelity even has an "auto roll" feature where you can sign up to have the principal for maturing bonds automatically reinvested in bonds of the same term.  If you set up, say, a 2-year ladder with 8 rungs then 1/8th of your cash in this ladder matures every 3 months.  With auto-roll, if you do nothing then every three months 1/8th of your cash simply rolls over into another 2 year bond (bought at auction).  If you need some cash for rebalancing or any other reason, you can prevent the auto-roll from happening and when the bond matures the principal is deposited in your brokerage cash account.  You can do the same thing through TreasuryDirect as well.  See
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Re: Treasury Bond Buying Tutorial

Post by dualstow » Sun Oct 30, 2011 9:59 am

Brilliant work, Gumby!

I use Fidelity for long bonds, too, since my 401(k) is there. For those of you who buy at auction like I do, I will add that you can sign up for email alerts about new offerings. The email looks like this:
Fidelity is pleased to announce the possibility for Brokerage customers to participate in next week’s U.S. Treasury Note/Bond Auction(s):

UST Maturing 01/26/2012 Auction Close Date:  10/24/2011
UST Maturing 04/26/2012 Auction Close Date:  10/24/2011
UST Maturing 10/31/2013 Auction Close Date:  10/25/2011
UST Maturing 10/31/2016 Auction Close Date:  10/26/2011
UST Maturing 10/31/2018 Auction Close Date:  10/27/2011
Link: https://www.fidelity.com/fixed-income-b ... ols/alerts
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Re: Treasury Bond Buying Tutorial

Post by 6 Iron » Tue Nov 01, 2011 11:02 pm

I sold about 80% of my TLT today at the market open, and I have an internal conflict. With the bulk of my long bonds liquidated, I feel as if my left flank is uncovered as I have the three business days before I can buy bonds. On the other hand, and I realize that I am violating the code here, but, I am extraordinarily tempted to market time or dollar cost average my move back in.

What would you do?
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Tue Nov 01, 2011 11:39 pm

6 Iron wrote: I sold about 80% of my TLT today at the market open, and I have an internal conflict. With the bulk of my long bonds liquidated, I feel as if my left flank is uncovered as I have the three business days before I can buy bonds. On the other hand, and I realize that I am violating the code here, but, I am extraordinarily tempted to market time or dollar cost average my move back in.

What would you do?
When you covert your TLT to cash, you've effectively turned 50% of your portfolio into cash. So, a portfolio consisting of (roughly) 50% cash, 25% stocks and 25% gold probably isn't going to be all that different from a traditional 4x25 PP over the span of three days. That's because you've basically turned your portfolio into a version of PRPFX (which can't own very many Long Term Bonds). Actually, your portfolio will most closely resemble Clive's "Rate Tart" PP — which held up very well through 2008-2009. The only difference between the "Rate Tart" PP and the 4x25 PP was that the 4x25 PP recovered more quickly in Dec 2008, when the LTTs kicked in big time.

http://gyroscopicinvesting.com/forum/ht ... 730#p12730
(Keep in mind that Clive's comments are deleted from the "Rate Tart" PP discussion)

So, you can probably relax more than you think. But, my recommendation is still to buy your bonds sooner rather than later, since we may be experiencing some high volatility in the next few weeks as Greece appears to move closer and closer to its eventual default. Do what feels right, but know that it probably won't make a tremendous difference either way.
Last edited by Gumby on Wed Nov 02, 2011 12:02 am, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by foglifter » Wed Nov 02, 2011 1:16 pm

Gumby, thank you very much for posting your tutorial. Now I feel ashamed that I've been with Fidelity for a long time and never even thought about the bond buying feature. In fact, I always thought that directly buying bonds is something very complicated and costly. And now I feel enlightened.

A couple of questions came to my mind after reading your post:

1. Market order vs. limit order: does it really matter which type of order to use?

2. Is it better to use a ladder of bonds spreading the purchases in time or just sell all my EDV/TLT and buy bonds at once?

3. What is the difference between buying at the auction or secondary market?
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Re: Treasury Bond Buying Tutorial

Post by dragoncar » Wed Nov 02, 2011 1:42 pm

I would also like to know what the advantage of buying at auction is.  It seems like you'd get slippage due to the multi-day difference between the auction close and the issue date.

I'm currently looking at Fidelity and trying to choose between two secondary-market options:

Name: UNITED STATES TREAS BDS
Coupon: 4.37500%
Maturity: 05/15/2041
Price: 126.687 / 126.781
Yield: 3.005 / 3.001
Quantity: 1,000(1) / 1,000 (1)

Name: UNITED STATES TREAS BDS
Coupon: 3.75000%
Maturity: 08/15/2041
Price: 114.125 / 114.172
Yield: 3.027 / 3.024
Quantity: 999(1) / 999 (1)

So what's causing the difference in yield?  Is it really the extra 3 months, or $1 difference in quantity?  I was going to grab some of the second, but it's clear I don't completely understand how bond buying works (I have TLT now)

Edit: OK, now that I've logged in I can see the images and this question has been addressed (kind of).  People are paying more for the higher coupon, even though the effective yield is therefore lower?  That seems kind of silly.
Last edited by dragoncar on Wed Nov 02, 2011 2:06 pm, edited 1 time in total.
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