Gyroscopic Investing

If you have a TreasuryDirect account with bonds nearing 20 years, what is the best way to sell these if you don't already have a non-retirement brokerage account?

The TreasuryDirect website says that you must first transfer the security to a bank, broker, or dealer, then ask the bank, broker, or dealer to sell it for you.

Somehow I believe that if I just waltz over to my nearest Wells Fargo branch and ask about it, after the raised eyebrows and questions on why I don't just use one of their wonderful savings accounts, I'd be directed to open a Wells Fargo brokerage account.

Is there a way to do this without opening an account?  And if I must open an account, which brokerage is the least likely to overcharge me for the transaction (like Wells Fargo would) of receiving and selling treasuries I already own?

Then, after the sale is completed, do I just keep the brokerage account open with a zero balance for the next 10 years, or do I close it immediately after?

Thanks!

I've never done it but when I do, I plan to use the bank where I keep my checking account. They do everything for me though I have no savings account. Don't you at least have a checking account?

I do.  Is that all I need?

Stewardship wrote: I do.  Is that all I need?

Well again, I haven't sold, but I don't know why a savings account is more important, unless there's something about that in treasury direct's online "literature."

The transfer out of Treasury Direct has to be into some entity that will hold the bonds as marketable securities and be able to sell them.  As far as I know, this means a brokerage account - not a checking or savings account.  After the transfer (which I think should be free of charge), your intent is to sell the bonds so the question you want to ask is how much will you be charged to sell the bonds.  Fidelity and Vanguard brokerages (currently) charge nothing to sell treasuries - other brokerages may or may not charge you.  After you sell, you're then presumably going to transfer the proceeds back into your Treasury Direct account and buy newly issued 30 year bonds, which means you'll need to link whatever cash account the proceeds end up in to your Treasury Direct account (to be able to transfer the cash back into Treasury Direct).

This is 4-step process:

1) transfer the bonds out of Treasury Direct and into a brokerage account
2) sell the bonds (at which point the proceeds will be in a cash account at your brokerage)
3) transfer the cash from your brokerage cash account back to Treasury Direct
4) buy new bonds in your Treasury Direct account

If you're willing to accept the additional risk of holding the bonds in a brokerage account rather than (directly) at Treasury Direct, this is 2-step process, i.e.

1) sell the bonds (proceeds become cash in your brokerage cash account)
2) buy new bonds in your brokerage account

I think most people consider the risk of holding assets in a brokerage account to be very small.  For example, I think hardly anyone holds stock in the form of stock certificates rather than as book entries at a brokerage anymore.  This is exactly analogous to holding bonds at Treasury Direct rather than at a brokerage.  Brokerages certainly can and do blow up, so direct ownership is definitely safer (although even if your brokerage blows up, I think it's unlikely you wouldn't eventually get your bonds - this is what SIPC insurance is for).  If you find it hard to deal with the 4-step process required to use Treasury Direct, by holding the bonds at a brokerage you can simplify this to a 2-step process.  One possibility is to split the bonds among several brokerages (for example, Vanguard and Fidelity).  To some extent, this is like storing physical gold in safety deposit boxes at two different banks.

Thank you, rickb.

Isn't holding treasuries in a SIPC-insured account the equivalent of holding cash in a FDIC-insured account?

Stewardship wrote: Thank you, rickb.

Isn't holding treasuries in a SIPC-insured account the equivalent of holding cash in a FDIC-insured account?

In the event of a catastrophic, 1930s-style depression, I doubt whether the FDIC *or* SIPC could provide compensation for more than a few pennies on the dollar.

goodasgold wrote:

Stewardship wrote: Thank you, rickb.

Isn't holding treasuries in a SIPC-insured account the equivalent of holding cash in a FDIC-insured account?

In the event of a catastrophic, 1930s-style depression, I doubt whether the FDIC *or* SIPC could provide compensation for more than a few pennies on the dollar.

SIPC is entirely different from FDIC. 

FDIC insures the principal amount (up to $250,000) if your bank goes under. Since most banks have nowhere near the total amount of cash their depositors have on deposit, given the right circumstances (e.g. 1930s-style depression) lots of banks would collapse and the FDIC would have big problems, even though the banks aren't doing anything particularly wrong or illegal.  FDIC insurance preserves the illusion that money you deposit into a bank is safe, in the sense that your principal amount will never go down.  The big impressive vaults at banks are part of the same illusion.  See this vault?  No one could break in.  Your money is safe here.  But that's not where your money is! 

SIPC is much more narrow and essentially insures only against brokerage malfeasance, for example what happened at MF Global.  The guarantee is that if your brokerage goes under, and on the way down they steal your assets (the stocks and bonds that are in your account), then the SIPC will (eventually, and it might take a while) restore your assets.  You'll get your stocks and bonds (up to $500,000 worth), but not the value those stocks and bonds might have had at the point the brokerage went under.  Unless brokerages are actively stealing from their clients, a 1930s-style depression wouldn't necessarily cause brokerages to collapse.

The principal value of treasuries, held in a brokerage or directly at Treasury Direct, is "insured" (insured in the sense of guaranteed) directly by the US Government with no intervening insurance agency.  Not paying the interest or not returning the full principal amount when treasuries mature is the unthinkable default that Congress keeps threatening in the debt ceiling discussions.  My understanding is paying the national debt is required by the 14th amendment - although if push comes to shove (i.e. at some point the debt ceiling is not actually raised) what might actually happen is apparently not particularly clear.  SIPC definitely does not backstop the value of treasuries in this scenario - and in this scenario my assumption is there would be a catastrophic economic collapse causing most banks to go under and FDIC wouldn't be able to backstop bank account balances either (i.e. it would be a mistake to think that money in a bank account would be safer in this sort of scenario).

Great info, Rick. Thanks!

Yes thanks rickb!!!

(btw - I've been lurking for a while and finally tempted back into posting.)